Reish, partner and chair of the Financial Services Employee Retirement Income Security Act (ERISA) team at the law firm of Drinker, Biddle & Reath LLP, noted the focus in the industry has traditionally been savings accumulation, but now the industry is asking, will workers have enough, and how will they withdraw their money so as not to exhaust accounts before they die? “I think the decumulation period will be more difficult [than the accumulation period],” Reish told attendees of the Retirement & Benefits Management Seminar, hosted by the University of South Carolina Darla Moore School of Business, and co-sponsored by PLANSPONSOR.
During the decumulation phase, participants will no longer have centralized education and support from their employer-sponsored retirement plan, and the move to retail support means more possible conflicts of interest and higher fees, Reish said. He contended that is what the anticipated regulations redefining the definition of fiduciary are really all about—individual retirement accounts (IRAs). “There’s lots of money involved expected to be rolled over from defined contribution plans,” he said, adding that he expects more regulations about IRAs in the coming years, providing protections such as individuals get in employer-sponsored plans.
One thing the Department of Labor is working to address the benefit adequacy issue and concerns about the decumulation phase for retirement plan participants is lifetime income projections on participant statements (see “Income Projections: Showing Participants A Better Way”). Reish says he believes there will be final regulations about this within two years and it will mandate plan sponsors or providers put projections on statements. “This is the rule that will have the biggest impact on participants, even though the fiduciary rule and fee disclosures have gotten more press,” he noted.
Reish asked attendees to think about employees getting this projection on their statements every quarter for 10 years, not just as a one-time thing they can ignore. “It will be like drip torture; after years of seeing it, it will make a difference,” he contended. He told attendees they do not have to wait for the government mandate to offer this to participants, as many recordkeepers have the capability now, and some are already doing it.
Reish said the impact on benefit adequacy comes from projecting the results of current behavior, providing a reasonable benchmark for comparing to typical needs, and providing guidance for helping to close the gap. The projection of the results of current behavior is all that will be required on statements; the other two may be offered by providers or are an opportunity for advisers to do participant education or offer to their retail business, he added.
Two risks to benefit adequacy are longevity of participants and withdrawal rates. Reish noted half of today’s 65-year-old men are expected to live to age 85, and half of today’s 65-year-old women are expected to live to age 88. He showed an example from the Congressional Research Service of how a 4% withdrawal rate could give some participants a 94% chance their money will last for 30 years, but moving the withdrawal rate up to 5% drops the chance to 77%, and moving it to 6% drops the chance to 48.5%.
Reish conceded that it is not a plan sponsor’s job to educate participants about this, “but, if not plan sponsors, who will?” he queried. “It’s inefficient to leave folks on their own.”
Reish pointed out that, for decades, 403(b) plan sponsors have successfully been using in-plan annuities, which could be a model for other defined contribution (DC) plans (see “What 401(k)s Can Learn from 403(b)s”). There are a number of available products plan sponsors may use to address the risks to benefit adequacy: traditional annuities, guaranteed minimum withdrawal benefits (GMWBs), longevity insurance, managed payout and retirement income mutual funds, and managed retirement income accounts.
Why should plan sponsors offer such products? Because of the success rate for participants, Reish said. He noted that more participants use in-plan products than rollover into or purchase such products during the 60-day window for rollovers at plan termination. In addition, in-plan products are institutionally priced and cost much less for participants than retail products.
There is another benefit for having a pre-arranged distribution methodology for participants, according to Reish; it helps address the risk of diminished cognitive abilities on the decumulation phase. “There’s something to be said for getting your financial future in order before your cognitive abilities diminish,” he said. “It will be helpful to participants’ families too.”
One topic Reish wanted to make a point about that is brought up with the issue of benefit adequacy is the focus on plan and investment fees. “The mantra now is that plan sponsors need to make plans as cheap as possible,” he said, “but, the best plans I’ve seen are high-cost.” This is because of better services, he noted.
According to Reish, the single most expensive thing plan sponsors can do is also of most value to participants—one-on-one advice. Reish admitted he was an advocate early on about fiduciaries watching plan costs, but now he feels the industry is in a death spiral. “Focus on providing the best services for participants,” he told seminar attendees.