Products & Services July 31, 2024

Franklin Templeton, Pacific Life Join In-Plan Lifetime Income Push

A new defined contribution managed account offers participants a chance to invest in a deferred fixed-income annuity.

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Franklin Templeton (Franklin Resources Inc.) and Pacific Life Insurance Co. on Tuesday announced their entrance into the defined contribution lifetime income market through a defined contribution managed account.

The firms’ partnership will see Franklin Templeton’s Goals Optimization Engine advice offering guide participant’s to “determine how much should be allocated” to a deferred fixed-income annuity provided by Pacific Life. The offering is designed for participants to accumulate during their working years a future income stream for their retirement years.

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“Once participants are ready to retire, they will then have the ability to turn that income stream on while receiving draw down advice on the remainder of their portfolio,” the firms wrote in an emailed statement. “This innovative approach to providing lifetime income to DC participants does so in a simple, holistic and personalized way.”

Franklin Templeton and Pacific Life enter an increasingly crowded field of DC retirement income options backed in various forms by direct annuity purchases or the option of annuitizing savings. While a popular topic in the retirement industry, the “pension-like” solutions are still in early stages of development, with firms such as Morningstar and Broadridge just recently developing methods of benchmarking and evaluating how they might work if implemented by plan sponsors.

Franklin Templeton and Pacific Life’s managed account can be set up by plan sponsors either as a participant opt-in or a qualified default investment alternative, according to the firms. It will be set up through a collective investment trust, which can offer lower fees when compared to investments such as mutual funds; the firms did not immediately respond to request for a fee range for the offering.

If participants leave the plan, they will “preserve the guarantees they’ve accumulated,” according to the firms’ email response. The firms also noted that they are using a middleware provider for the annuity that can integrate across multiple recordkeepers if those recordkeepers partner on offering the investment.

“Participants who leave their employer can retain their interest in the in-plan annuity until retirement, sell their investment and roll over to an IRA, or, if they are past [age 59.5], opt to take the annuity with either an immediate or deferred (up to age 73) payout,” the firms wrote.

As of now, Franklin Templeton and Pacific Life have a plan sponsor agreement to offer the solution and are working with that sponsor’s recordkeeper on implementing it, the firms wrote. They are also in conversations with other recordkeepers to start offering the investment on their platforms.

“This is a significant time for retirement income, and [we are] committed to partnering with advisors, consultants, asset managers and recordkeepers to connect plan sponsors with innovative lifetime income solutions,” the firms wrote.

The offering, the firms also noted, is the results of years of collaboration. Pacific Life noted in the announcement that studies it has conducted found 58% of respondents prefer “incremental lifetime income purchases” instead of a larger purchase of an annuity at retirement.

“The design of Income Horizon aligns with this preference for incremental purchases over time,” said Brian Woolfolk, executive vice president and head of institutional business at Pacific Life, in a statement. “When integrated with GOE, [it] creates a simple, holistic, and personalized approach to securing lifetime income in retirement for plan participants. This innovative solution built with Franklin Templeton is a significant advancement over the traditional one-size-fits-all approach.”

Data & Research July 31, 2024

Morningstar: 45% of Americans Will Run Short of Funds if Retiring at 65

A new retirement savings simulation tool by the financial services firm signals widespread retirement shortage.

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Morningstar Inc’s retirement group has added to the ongoing dialogue around a retirement savings shortfall for many Americans with a study based on a new retirement savings simulation tool.

According to the investment and retirement services provider, about 45% of Americans will run short of money in retirement if they retire at the traditional age of 65. That scenario is starkest for those in the private sector, where company-sponsored retirement plans are less prevalent, according to the findings; by comparison, only 29% of public-sector workers are forecast to face similar savings shortfalls.

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“Indeed, the public sector is the industry with the highest likelihood of a worker having access to a retirement plan,” Morningstar’s researchers wrote in the report. “Second, the results were better for industries wherein DB plans are more common. Again, the public sector stood out in this regard, as did the manufacturing sector and miscellaneous services sector.”

Morningstar’s findings point, overall, to the need for Americans to save more and for longer in tax-deferred savings programs, with results improving dramatically for people able to take that path.

The report is based on a new tool developed by Morningstar to be used by its research center, that considers “individual characteristics, healthcare costs and projected longevity to assess retirement income sufficiency.” The model draws in part on Morningstar’s proprietary data, including participant data from about 1,000 defined contribution plans. It also uses publicly provided databases for its analysis including the Federal Reserve Board’s Survey of Consumer Finances, the University of Michigan’s Health and Retirement Study and Consumption and Activities Mail Survey.

The researchers are also using the model to “simulate 1,000 retirement outcomes, which entails projecting all kinds of variables, such as savings rates, investment returns, retirement expenses, and health states (certain health states have associated long-term services and supports costs),” Spencer Look, associate director for the Morningstar Center for Retirement & Policy Studies, explains by email.

Delay If You Can

According to the report, if Social Security remains as it is today, delaying retirement to 67 will reduce those with a retirement savings shortfall to 38% of the population; if claiming Social Security is delayed to age 70, that drops lower to 28% of the surveyed group.

Meanwhile, among the generations, baby boomers and Generation X are most likely to experience retirement shortfalls, according to the report.

About 47% of Generation Xers and 52% of baby boomers “may experience retirement shortfalls” as compared to 37% for Generation Z and 44% for Millennials. Part of those findings are related to the amount of time people have to save, along with being amid the heart of the “transition from a DB-dominant system to a DC-dominant system,” the researchers wrote.

For those still in their working years—Generation Z, Millennials, and Generation X—if they are not participating in a qualified retirement plan, their retirement funding ratios (projected income versus projected expenses) take a dive. Morningstar’s report shows that 57% of people not participating in a DC plan may run short of money in the future, as compared to just 21% for those slated to contribute to a plan for 20 or more years.

“There is a retirement crisis …. for those who do not or are unable to participate in a defined-contribution plan,” the researchers conclude.

The report also details data showing that lower-income workers are more susceptible to lacking enough savings for retirement, and that Hispanic and Black Americans are in worse shape for retirement.

According to the findings, 61% of Hispanic Americans and 59% of non-Hispanic Black Americans are projected to run short of money in their later years, compared to 40% for both non-Hispanic other Americans and non-Hispanic white Americans. The disparity is “largely a function of the racial wealth gap, specifically the disparities in retirement account balances,” according to the report.

Crisis Or Challenge?

Morningstar laid out its findings in a report titled: “Beyond the Retirement Crisis Headlines: Why Employer-Sponsored Plans Are the Key to Retirement Adequacy for Today’s Workers.”

That “retirement crisis” language aligns with a rallying cry heard from others in the financial service space recently, including BlackRock’s Larry Fink writing in his annual report in March that the U.S. should consider a “retirement rethink.”

Other voices in the retirement space are pushing for more nuanced language. In a report published earlier in July, PGIM noted that while many people may feel there is a retirement crisis, their savings often do not paint as dire a picture.

“While I understand the perspectives and obstacles Americans face when it comes to saving for retirement, I prefer to think of the current state as a challenge, not a crisis,” David Blanchett, PGIM’s DC solutions head of retirement research and portfolio management, wrote in the report. “Access issues notwithstanding, our retirement system is one of the best in the world, and we’re making changes to increase availability of workplace retirement plans and improve behaviors among employees participating in the plan to ensure they can live a better life, longer.”

In its report, Morningstar proposes various solutions for the retirement sector, including expanding access to DC plans for workers, working on improving participation rates for those with access, and implementing plan design features such as auto enrollment and escalation.

Going forward, Morningstar’s research team will use the new model to consider various parts of the retirement investing space, including “the impact of broader economic factors and policy changes on retirement security outcomes, focusing on topics such as the Saver’s Match, auto-portability, annuities, and other policy proposals to change or overhaul the 401(k) system.”

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