August 26, 2010
--- A New Look at the Importance of Income Replacement ---
Whether implementing, administering or participating in a workplace retirement plan, the emphasis all too often is on “accumulation” and helping employees build up assets during their eligible contribution years.
To be sure, amassing a sufficient nest egg is an important objective of 401(k) plans, as well as their 403(b) and 457 counterparts. And for most Americans today, the amount they set aside in a workplace retirement account represents their single largest asset. However, asset accumulation isn’t the only part of a sound financial plan. Furthermore, many employees don’t know how those funds should be distributed once they reach retirement age and withdraw their money.
Financial advisers have a unique opportunity today to consult and advise employees on their plan distribution options well before retirement. Historically, most defined benefit plans offered members the option of selecting an annuity or an alternative form of guaranteed lifetime payment. However, that has not been the case within the defined contribution landscape, which has expanded considerably over the past three decades.
In fact, most 401(k) plans do not offer payout methods other than taking a lump sum. The primary reason is that plan sponsors don’t want to worry about satisfying the rigorous fiduciary obligation of selecting an annuity provider. Sponsors also avoid the administrative burden of obtaining spousal consents, which are required when offering lifetime payment options.
Yet during the downturn of 2008-09, many plan participants, especially those nearing retirement, learned the hard way that lump sum investments are subject to volatile market swings without any guarantees or protections. In the aftermath, a renewed interest has emerged in generating a guaranteed replacement for one’s paycheck during retirement. So what is being done to help millions of working Americans better understand and access these opportunities while they are still in plan?
Our nation’s policymakers have recently launched two initiatives to increase the awareness and use of lifetime guaranteed payments. First, a bill is currently in Congress that would require sponsors to provide participants with an annual statement showing what the current value of their accumulated savings would be if translated into a monthly annuity at retirement age. The purchase rates for the annuitized amount would be provided by a table published by the Department of Labor.