July 18, 2012
--- A sometimes-overlooked option for retirement income in
defined contribution (DC) plans can help keep participants from outliving their
retirement savings, sources said. ---
Participants who rely on average life expectancy in
their planning could face a shortfall in retirement income. “The problem with averages is, it’s OK if you’re the average
Joe or less-than-the-average Joe in the situation, but if you live too long or
longer than planned, and you run out of money, that’s not a good position to be
in,” Srinivas D. Reddy, senior vice president, Institutional Income
at Prudential, told PLANADVISER.
To make sure retirees can match income
with expenses, retirement income options allow participants to think in monthly
terms. In this sense, they resemble defined benefit (DB) plans—“old school
pensions”—that many companies can no longer afford, said Jason Chepenik, a
managing partner of Chepenik Financial. They can, in fact, save plan sponsors
Reddy said that participants who do
not save adequately for retirement might work longer. With older employees on
the books, companies will face expensive payroll and health care expenses.
This raises the question: why don’t plan
sponsors offer these options?
Reddy said he sees plan sponsors
make statements like, “Well, I don’t want to be first”; “no one’s asking me for
it”; and “I’m not sure what my liability is in the future if I do have it.”
Chepenik echoed their legal concern.
“It’s a litigious society,” he told PLANADVISER. “Especially the 401(k)
world today there’s much more focus on not making a mistake, and if you follow
the past, it’s harder to make a mistake. If you do your own thing, you get
called out for it.”