SunGard is expanding
its managed services capabilities to help retirement plan administrators and
recordkeepers reduce costs, comply with new regulations and focus on service
differentiation.
SunGard provides IT outsourcing and hosted solutions to
administer more than 63,000 retirement plans for more than 9.2 million
recordkeeping participants, as well as document management services for more
than 10,000 active plans and restatement management services. With its expanded
offerings, SunGard provides the following:
Participant
processing for contributions, disbursements and loans;
Remittance
processing for contributions and loan repayments;
Compliance
test offerings, including 5500 preparation and plan design comparisons;
and
Plan
set-up and implementation.
Mike Rogalski, president of SunGard’s wealth and retirement
administration business, said, “Retirement administrators are seeking outsourcing
options that will help them improve efficiency of operations, reduce costs and
alleviate the pressure on internal IT departments.
SunGard’s retirement managed services offer a full range of functions that
support essential tasks, helping our customers focus on serving their
clients.”
Using the
Internal Revenue Service’s (IRS’s) required minimum distributions (RMD) as a withdrawal
strategy does almost as well as traditional options and outperforms the 4%
rule.
The Center for Retirement Research (CRR) at Boston College
analyzed the traditional rules of thumb for withdrawal—including spending
interest only, basing withdrawals on life expectancy or adopting the 4%
rule—and compared them with the IRS’ RMD strategy (or a percent of assets that
individuals are required to withdraw each year starting at age 70.5). In
comparing the RMD with the 4% rule, the RMD strategy performed better. In
dollar terms, a 65-year-old couple would need about $25,000 more (or 10%) of
their $250,000 savings to be persuaded to use the 4% rule instead of the RMD
strategy.
A spending interest only strategy can work for wealthy
individuals, but has drawbacks for those who lack substantial retirement
savings. One disadvantage is that when an individual dies, he will leave behind
all of his initial wealth plus capital gains. In some cases, this unnecessarily
restricts retirement consumption. Another drawback is that a retiree’s income
and consumption are dictated by his asset allocation, running the risk of a
portfolio allocation that does not minimize the risk for any given level of
expected return on the portfolio. In other words, the retiree may overinvest in
dividend-yielding stocks, losing the benefits of diversification.
A second strategy is to spend all financial assets over
one’s life expectancy. The equation to calculate this is not simple for most
people, and retirees face a high probability (a 50% chance) they will outlive
their savings and be forced to rely solely on Social Security.
Spending a fixed percentage of one’s initial retirement
savings is another popular strategy, commonly known as the 4% rule. The
advantage is that the retiree has a low probability of running out of money;
the drawback is that the rule does not permit retirees to periodically adjust
consumption in response to investment returns. For instance, if returns are
less than expected in a given year, the retiree should respond by reducing
consumption to preserve the assets—a fixed 4% withdrawal does not allow this
flexibility.
(Cont’d…)
The alternative strategy is to follow the IRS’s required
minimum distributions, a strategy that is easy to follow, the brief said. The
IRS stipulates withdrawal percentages based on life expectancy tables.
Furthermore, it allows the percentage of remaining wealth consumed each year to
increase with age, as the retiree’s remaining life expectancy decreases. Since
the consumption is not restricted to income, the household is less likely to
chase dividends and more likely to have a balanced portfolio. Additionally,
consumption responds to fluctuations in the market value of the financial
assets, because the dollar amount of the drawdown is based on the portfolio’s
current market value.
A potential criticism of the RMD rule is that it results in
relatively low consumption early in retirement. This outcome might be optimal
for some households, particularly those fearful of rising health care costs,
but others might prefer greater consumption at younger ages when they are
better able to enjoy it. This can be achieved through a modification of the RMD
rule, or to consume interest and dividends but not capital gains, plus the RMD
percentage of financial assets. For example, a 65-year-old couple with
financial assets of $102,000 who received $2,000 of interest and dividends in
the last year would spend $5,130 (the $2,000 in interest and dividends plus the
3.13% annual RMD of $100,000). In contrast, a household following the
unmodified RMD rule would spend just $3,130.
Rather than attempt the complicated calculations for drawing
down and spending retirement savings, retirees rely on easy-to-follow rules of
thumb such as the 4% rule, the brief said. The IRS’ RMD rule may be a viable
alternative, the brief suggests, and a modified RMD strategy performs even
better.