The prevalence of defined contribution (DC) retirement savings plans has increased with the shift away from employer-provided pensions, placing the onus of growing a retirement nest egg on the individual, especially in the private sector.
While most plan sponsors offer savings plans with features designed to help participants reach their retirement funding goals, that’s only half of the picture. The other equally important part is decumulation: the conversion of lump-sum retirement funds into lifetime income.
This latter phase of retirement fund management is complex, and there is no one-size-fits-all solution. As a result, there is a growing need for plan sponsors to provide education and resources to help participants understand the issues and available options.
What makes decumulation complicated?
There are many nuanced and personal questions employees must ask themselves as they transition to the decumulation phase of retirement, such as:
- How much annual income will I need during retirement, and how long do I expect to live?
- How do I ensure I will not run out of money by preparing for longevity, sequence of returns (the possibility of experiencing negative returns on an investment portfolio early in retirement, when there’s little time to make up for the losses) and other risks?
- How should I invest during decumulation?
- Do I need to provide for a survivor following my death?
Employees’ comfort level and competence in answering these and related questions will vary. Not all participants have access to professional investment advice outside of their savings plan, and those who do may benefit from supplementing the advice of commission-earning advisors with guidance from an objective third party.
How can plan sponsors help?
The lifetime income illustrations required under the SECURE Act are a natural starting point for plan sponsors to begin educating employees more broadly about lifetime income options.
Educated participants will be able to make informed decisions about the order in which to use their sources of retirement income.
Participants also need to know how Social Security works, since it is essentially an inflation-protected annuity that is payable for life. In addition, they should understand the option and advantage of delaying their Social Security benefit. Educated participants will be able to make informed decisions about the order in which to use their sources of retirement income.
A small number of plan sponsors offer participants immediate or deferred in-plan annuities or access to insured group or individual annuities outside of the plan. With the SECURE Act affording plan sponsors safe-harbor protocols for selecting in-plan annuities, that market will continue to evolve, and pricing should improve. In the meantime, learning about available annuity products and how they are priced will help participants confidently leverage guaranteed income, self-insuring, longevity pooling or a combination of strategies to achieve their lifetime income and other financial goals; even rolling over to an employer’s pension plan to receive a monthly annuity may be an option for some.
Plan sponsors can also educate participants about various decumulation strategies and help them implement those strategies by offering plan features that make it easier to schedule withdrawals over an extended period of time. This often-overlooked plan design strategy is relatively easy to implement and gives participants a meaningful way to convert funds into a predictable income stream.
Why should plan sponsors help?
It is often advantageous for retirees to leave their funds in a former employer’s savings plan, where administration fees and investment expense ratios may be lower than what the retiree could secure in an individual retirement account (IRA).
Similarly, in-plan annuities may offer favorable pricing in comparison to annuities available on the individual market. In light of these facts, many plan sponsors are evaluating their corporate social responsibility to help current and former employees decumulate their retirement savings even as responsibility for accumulating retirement income continues to shift toward employees.
Preparing workers for decumulation holds practical advantages, too. For example, retaining plan assets can help plan sponsors grow or maintain pricing leverage for all participants in the plan. And by helping plan participants feel prepared to move toward retirement with confidence, plan sponsors can make room for the next generation of talent.
Secure retirement is a social issue that affects us all. While employers’ role in retirement is evolving, their actions continue to have a profound impact on the retirement industry. The more plan sponsors can help participants during the decumulation phase, the more secure all our retirements will be.
SEE ALSO:
• Auto Everything—Including 401k Auto Decumulation
• Employees Crave More Help to Create Lifetime Income Strategies
Mindy Zatto, FSA [Fellow, Society of Actuaries], EA [Enrolled Actuary], MAAA [Member, American Academy of Actuaries], FCA [Fellow, Conference of Consulting Actuaries], MSPPA [Member, American Society of Pension Professionals and Actuaries] is a founder and principal of Strategic Benefits Advisors, an independent, full-service employee benefits consulting firm focused on solving complex benefits issues for clients ranging from 1,000 to over 300,000 employees. Zatto has over 30 years’ experience in benefit plan administration and consulting. She can be reached at info@sba-inc.com.
