There is a rising need, and demand, for lifetime income solutions in employer-sponsored retirement plans, according to a panel of experts hosted by Income America President Matt Wolniewicz on Thursday afternoon.
Income America is an in-plan target-date series featuring guaranteed income, and the wide-ranging discussion covered the low adoption of guaranteed products traditionally seen, barriers that inhibited innovation in the space, and what Income America is doing differently to drive utilization going forward.
Panelists included Income America partners, as well as former Wolniewicz colleagues:
- David Blanchett, Morningstar
- Jennifer Doss, CAPTRUST
- Matthew Eickman, Qualified Plan Advisors
- Jason Roberts, Pension Resource Institute, Retirement Law Group, and
- Glenn Dial, American Century Investments
Wolniewicz began with a personal anecdote involving his father’s retirement in the second quarter of 2008, reinforcing the damage that sequence-of-returns risk can have on a retirement portfolio. Assets are typically withdrawn for everyday living expenses just as a market downturn causes a decline in the value of the portfolio overall, a devastating situation from which it’s almost impossible to recover and a reason lifetime income is so important.
The difficult task of accurately estimating retirement income for the individual was then illustrated, citing National Institute on Retirement Security and EBRI statistics:
- 79% of retirees say that workers don’t know enough about investing to ensure retirement savings last through retirement.
- 61% of employees say that preparing for retirement makes them stressed.
- Yet, three-quarters are interested in rolling some or all of their DC plan savings into a financial product that would guarantee income for life.
“The essence of retirement is incredibly personal,” Eickman said when recapping pensions and defined benefit plans once common in the workplace. “As we think about American workers and retirement plan participants, we need to all keep in mind the personal nature of their eventual retirement and the need to ensure that each and every individual has the best opportunity to achieve the type of dignified retirement we all hope for.”
Noting that the reason employers moved away from DB plans toward DC plans was not that lifetime income was somehow a “bad thing,” he said the reason was shorter employer tenure, more prohibitive legislation, and the resulting volatility on companies’ financial statements.
“The greatest value of that old structure was that sense of security and sense of comfort that an individual could have when he or she would retire,” Eickman added. “I’m optimistic that we’re headed in a direction where that’s going to become a reality again.”
Increasing demand
Plan sponsors are asking for lifetime income options, at least more so than in the past, according to CAPTRUST’s Doss.
“I think we’re doing a really good job of emphasizing to plan sponsors that you can’t just focus on the accumulation phase and that you have to think about your retirement plan as a decumulation vehicle as well,” Doss said. “I do think over time that’s starting to resonate.”
Fear of litigation and complexity were cited as barriers to adoption, and that “plan sponsors want to do the right thing, but they’re not sure if that’s going to be perceived as the right thing by plan participants.”
Morningstar’s Blanchett argued that adding guaranteed income to a retirement plan isn’t simply adding an investment to a fund menu that can be replaced the next day; it’s a long-term choice to help participants accomplish a different or better retirement.
“Too often, at least historically, plan sponsors have focused on a DC plan as an accumulation vehicle, not as a vehicle to help their participants retire,” he said, echoing Doss. “I’m hopeful, though, that more plans will start to say, ‘Hey, I have institutional buying power. I can ensure my participants get access to high-quality investments and other services that are backed by a fiduciary that they can’t get on their own.’ I’m hopeful things will change, but I was hoping they would change five years ago. I think we’re seeing that.”
The F and the A words
Wolniewicz turned to a discussion of the F-word (fiduciary) and the A-word (annuity).
“It’s not that annuities are bad,” he noted, “it’s just that if a retail investor is left to make a purchasing decision, we know that they don’t read the prospectus, ever, and it’s pretty hard for them to wrap their head around all the choices that are available to them.”
Blanchett responded that most annuities in the DC space are liquid with no surrender penalties and “are the best of what’s available.” In the retail space, by contrast, purchasing decisions are typically made without the aid of a fiduciary, leading to outcomes that simply aren’t good. It’s not as much of a concern in defined contribution plans.
Roberts responds
So, from a legal and regulatory standpoint, why guaranteed income, and why now?
“The lack of a clear roadmap or safe harbor was a big impediment,” Roberts said when asked why the current environment seems more conducive to lifetime income products, adding portability was also a concern. “Plan sponsors, as well as advisors and investment managers, feared they’d be on the hook if the guarantees were not fulfilled.”
But legislation, regulation, and product innovation have “stripped away” many of the traditional barriers.
“If we were having this conversation five years ago, I would consider it academic and aspirational, but I really do believe that with all of the things we’ve touched on, this is no longer academic,” Roberts continued. “Particularly on the advisor side, I’m seeing the advisors roll up their sleeves and commit to helping in a high-touch way to get some of these products into the plans they serve.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
