Coming out of the 2008 financial mess were tales of scores of workers delaying retirement and retirees returning to work. “We all know people who planned to retire but couldn’t after the fourth quarter of 2008,” says Charlie Nelson, President of Great-West Retirement Services in Greenwood Village, Colorado. Market volatility wreaked havoc on defined contribution and IRA assets that had no income guarantees or downside protection.
Market volatility led to participants and retirees looking at retirement investments in a whole new light. According to a 2009 Merrill Lynch survey, 56% of participants surveyed stated that the economic volatility of 2008 and 2009 made them look at retirement differently, and 51% said they wished they had spent more time planning for retirement, says Katherine Roy, Head of Personal Retirement Innovations with Merrill Lynch Wealth Management.
With employees delaying retirement or former employees clamoring to return to work, sponsors began reconsidering how retirement income is provided to workers. There has been a lot of conversation regarding retirement income, particularly delivery, says David Wray, President of the Profit Sharing/401K Council of America in Chicago. There is new focus on providing a less volatile experience to participants, he says.
Historically, the problem has been that the typical defined contribution account does not translate into a guaranteed stream of retirement income payments, but there were not any workable solutions to provide participants with steady retirement income. Previously, says Nelson, products providing guaranteed retirement income were retrofitted and did not work well in defined contribution plans.
Sponsors now are showing more interest in providing retirement income products designed exclusively for the defined contribution market, says Nelson. In response, vendors are creating a new generation of retirement income products, designed specifically to fit inside defined contribution plans, says Nelson. Newer generation products address retirement plan issues such as qualified domestic relations orders and fiduciary liability, he says. Additionally, the newer products are portable, so there are no hindrances if, for example, the recordkeeper is changed.
Some new products allow participants to dollar-cost-average the purchase of an income stream with the money put into a defined contribution plan, rather than just stocks and bonds, says Wray.
Other new products offer participants insurance protection five to 10 years prior to retirement to protect against volatility, says Wray. Sponsors now can offer participants the option to buy wrappers that preserve principal, he says. Participants enjoy the advantages when the market goes up, but it still provides a steady check, says Nelson.