Accumulation to Income: Time to Fill the “Gap”

For years, retirement education focused on the need to save; but as Baby Boomers are starting to reach retirement, they’ll have to turn that accumulation into a source of income.

At the end of an hour-long discussion about retirement income during the inaugural Virtual PLANADVISER National Conference, one of the panelists, Paul Powell, Managing Director, 401(k) Advisors, brought the conversation full circle by saying, “We’re only at the beginning.”

Powell was joined on the panel by Mark N. Fortier, Head of Product and Partner Strategy, AllianceBernstein Defined Contribution Investments, and Sherrie Grabot, CEO of GuidedChoice.

The central question was whether plan sponsors should care about what happens to their participants once they reach retirement; should they do more to ensure that employees get the maximum value from their retirement savings? The panelists said sponsors are still largely divided on this front; advisers will need to figure out strategies with clients on a case-by-case basis. 

To best understand where the retirement income is going, the panelists discussed industry history. As defined contribution plans gained in popularity, education focused on active saving and the fundamentals of asset allocation. Plan design focused on open-architecture to give participants as many option as possible.  However, the realities of participant behavioral finance soon began to sink in; participants were not heeding the lessons and inertia reigned supreme.  And most recently, auto-design features have gained in popularity and accumulation is happening “automatically.”

The question about retirement income specifically, then, becomes one of in-plan solutions or at-retirement solutions, the panelists said.  Grabot of GuidedChoice pointed out that a major hurdle of any type of solution would be to calculate all the difference savings a participant may have. She said that seven out of ten households will use more than one savings account or source in retirement. These fragmented situations would require some sort of blended solution.

Another challenge pointed out by Fortier of AllianceBernstein is that many participants don’t put longevity risk into the equation; people are generally concerned about living too short an amount of time, and not many consider running out of money while they are still alive.

Powell said for participants, it’s a matter of framing the issue in the right light. He said advisers should undertake more gap analyses with participants–that can be a highly effective way to show someone the criticalness of their situation.

An in-plan solution is when the plan has both an accumulation and income part, provided by the plan sponsor. Fortier mentioned that a guaranteed minimum withdrawal benefit (GMWB) is a “sweet spot in the middle.”  He also said many products have an “if we build it, they will come” attitude, but that’s clearly not the case. Both sponsors and participants still require ample education before any product appeals to them.

As far as at-retirement solutions go, Grabot says they will run the gamut and participants will be more-or-less on their own to find a solution that works for their unique situation.

The panelists said any product for retirement income will need to include some sort of portability–portability for the provider, the plan, and the participants.