Toland, Finke to Launch Income Planning Tool to Visualize Withdrawal Options

Retirement and annuity experts created IncomePath, which can include an assessment of annuity options in a saver’s retirement income plan.

To make retirement income planning and execution more accessible, retirement industry veterans Tamiko Toland and Michael Finke are partnering on a new venture called IncomePath.  

The tool will create a visual representation of retirement withdrawal strategies depending on what personalized inputs are added, including assessing retirement income annuity options, according to Toland and Finke. In their new white paper, “Freedom to Spend: Building a Better Retirement Income Plan Using Income Paths and Flexible Spending,” they argue that an adaptive withdrawal strategy can allow retirees to take larger withdrawals early in retirement. The trade-off is that retirees would have to commit to more modest spending increases later in retirement. 

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While IncomePath will initially only be available to individual financial professionals in the retail environment, Toland says she sees an opportunity for creating customized versions of the tool for different firms and different products in the 401(k) sector. Toland says she is having conversations with 401(k) providers to figure out how the tool can be used as part of the “participant experience.” 

The tool, expected to be available for individual financial professionals in the coming months, includes a “step-by-step” retirement income planning guide and visual aid that allows retail clients to choose their lifestyle path, according to Toland and Finke.  

IncomePath allows a financial adviser to select the right combination of investment risk, portfolio withdrawals and annuity income to help visualize how risk affects possible lifestyle paths and spending in retirement. Toland says the tool is meant to be used alongside other retirement planning software that already exists. 

“One of the things that we want people to really understand is that when you have guaranteed income from an annuity, that allows you to investment more aggressively into equities with the rest of your portfolio,” Toland says. “Because you don’t have to take withdrawals as much out of the rest of the portfolio, then you can allow it to grow and it can work in your favor, giving you more of a potential of increasing income during retirement.” 

Since leaving TIAA in September 2023, where she was the head of lifetime income strategy and market intelligence, Toland started her own consulting firm—Toland Consulting LLC— and is now the CEO of IncomePath. Toland has focused on the issue of lifetime income since she was a trade journalist covering annuities more than 20 years ago.  

Finke is IncomePath’s chief strategist and is also a professor and chair of economic security at the online American College of Financial Services.  

In the defined contribution system, Finke says investors have a greater responsibility for figuring out how to turn their savings into income. He says planning software often focuses on the “lens of failure.” For example, a planning tool may tell a person to take out a certain amount of money every year with a “15% chance of failure.” 

“In many ways, [that’s] really the wrong way to think about it, because it assumes that you’re going to spend the exact same amount of money every year, which is not realistic,” Finke says. “[If] the markets don’t do well, you’re probably going to adjust downward a little bit. So [the failure model] doesn’t allow for spending flexibility, and it also focuses on something that’s very negative.” 

In building IncomePath, Finke says he and Toland wanted to create a process that is “realistic and optimistic” and helps people understand the relationship between investment risk and spending. They also intended to demonstrate how taking a portion of one’s savings and using it to buy an annuity can impact the path of spending over time.  

The methodology behind IncomePath involves a withdrawal strategy that recalculates every year based on the account value and expected lifespan of the individuals. In addition, it allows a withdrawal adjustment that permits spending flexibility up to a stated percentage of the previous year’s withdrawal.  

Finke and Toland argue that the 4% rule—withdrawing up to 4% of one’s savings in the first year of retirement—provides a “reasonable” degree of income flexibility that many retirees would tolerate. However, unlike the 4% rule, the experts believe that spending more when asset returns are higher allows a retiree to enjoy a lifestyle benefit from accepting investment risk.  

“We have a really flexible approach to actually implementing this,” Toland says. “Right now, we don’t really see going directly to consumers as a great way of helping them have a more confident retirement because most people need some kind of guidance. There are lots of financial planning tools out there for financial professionals, and they’re great. They’re often very detailed and include things like taxes and specific asset allocations. What we’re really focusing on is a different way of showing … retirement outcomes that [are] much more high level and directional, and then also integrat[ing] that annuity piece.” 

401(k) World: Recordkeepers, Advisers and ‘Co-opetition’

The third installment of Planadviser In-Depth’s series on the 401(k) market considers the various ways recordkeepers are looking to evolve.

The assets in defined contribution and benefit retirement plans have grown by trillions in the decades since workplace retirement plans started becoming commonplace, hitting about $11.75 trillion in 2022.

But even as more people are saving in workplace retirement plans, the business trend for recordkeepers themselves has gone decidedly in the opposite direction: fee compression, consolidation and the need for related services to drive revenue.

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One answer the industry has looked to is scale, with larger players gobbling up smaller ones in a trend that some expect to continue before it slows. With that scale has also come diversification of services, ranging from participant education and financial wellness offerings to asset management and, more recently, wealth management. For some retirement plan advisers, these services may be useful—but they also may come in direct conflict with the advisories’ own business models.

Since recordkeepers and advisers in many ways rely on each other, the relationship was characterized as “coopetition” by consultancy Cerulli Associates in 2022, a phrase picked up and used at industry conferences and events. How this relationship sorts itself out in the coming years will have big implications for the industry, as well as the participants it serves. Below are some of the key areas in which recordkeepers are currently playing, with the results still to come.

Asset Management

Recordkeepers with asset management arms regularly offer their own retirement plan investing funds to plan advisers and plan sponsors, often at lower fees than other providers. Proponents of such a model see it as a win-win for plan sponsors and participants.

“As a fiduciary, if your obligation is to maximize the value for participants, you almost have an obligation to look at the combination of those things,” says Mike Shamburger, head of T. Rowe Price’s core markets and retirement plan services. “As long as the asset management is top quality, and it meets the requirements of the investment policy statement [IPS], and you can leverage that for better recordkeeping fees, that’s better for the client.”

To avoid conflicts of interest, however, plan sponsors and their advisers must still have a process and conduct due diligence comparing those proprietary funds with others available and monitoring and benchmarking those funds on an ongoing basis.

“I have no issue with a plan sponsor making the decision to use a platform’s proprietary fund that then results in lower recordkeeping fees,” says Tom Clark, partner in and COO of the Wagner Law Group. “As long as those funds are prudent and they otherwise pass the IPS, why wouldn’t you go and get that cheaper price?”

Revenue-Sharing

Recordkeepers without their own funds may look to revenue-sharing deals with mutual fund providers. Under such terms, fund providers pay rebates to a recordkeeper for inclusion. However, research has found such arrangements can influence a fund lineup, with revenue-sharing funds more likely to be added and less likely to be removed from the lineup in a given plan.

Revenue-sharing fees are also often less understood by plan sponsors, who may not know they are paying them or that they ultimately go to the recordkeeper, says Marilyn Suey, owner of Diamond Group Wealth Advisors. The fees originated to offset expenses from investment funds’ marketing costs but have evolved to a more important revenue stream for recordkeepers.

“People have to watch out for those fees,” Suey says. “Recordkeepers have to be able to make money, but you just have to make sure that it’s fair.”

Beyond the Fund Menu

Recordkeepers are also looking to sync with wealth management arms, when they have them, to manage participant rollovers or in-plan assets for a fee.

“A lot of recordkeepers are investing heavily on the wealth management side to see if they can manage the retail side of the business,” Shamburger says. “Some firms with banking capabilities are trying to see if they can introduce those in an effective way, and others are really looking at managed accounts as a way to earn additional revenue.”

In addition to managed accounts, recordkeepers are introducing more tech-fueled tools that aim to help participants—at scale—make progress toward financial wellness goals. They are also looking at other ways to earn revenue off of participant assets.

“Some recordkeepers are doing proactive outreach to terminated participants to try to keep that money with the provider, and with the rules around annuities loosening up, some also see that as an opportunity, particularly for the insurance companies, to make some fat margins,” says Nathan Boxx, director of retirement plan services at Fort Pitt Capital Group in Pittsburgh. “They’re being creative, that’s for sure, because the old way of doing things is dead and buried.”

Potential for Conflicts of Interest

Many view the push into new services and the hawking of proprietary funds as a necessity for a low-margin business that has experienced massive consolidation, but some plan advisers and sponsors feel there is too much pressure to use recordkeepers’ proprietary funds or other services. The recent spate of 401(k) lawsuits alleging that fiduciaries have failed in their role, by simply providing the options most convenient to the recordkeeper, confirm the validity of such concerns in certain circumstances.

Such risks are potentially higher for smaller plans with less time or expertise to spend on evaluating whether a discount is a good deal for participants. Last year, 40% of excessive fee lawsuits related to plans with less than $1 billion in assets, and half of those had less than $500 million in assets, according to JD Supra.

Looking ahead, industry experts expect the trend of consolidation to continue—and for recordkeepers to continue looking for additional sources of revenue.

“The cost of technology, especially around cybersecurity, is just so great that you need a larger and larger denominator of assets to spread those costs across,” says Clark, of the Wagner Law Group. “That is pushing up the number of participants and assets that they need to be profitable. The same thing is happening in the advisory world.”

On Thursday, our PLANADVISER In-Depth series will focus on DCIO asset managers.

 

More on this topic:

401(k) World: The Piggy Bank
401(k) World: Retirement Plan and Wealth Advisement
401(k) World: DCIO Managers Adjust to Fee Pressures
401(k) World: Cyber Thieves
401(k) World: The Litigators

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