Despite years of industry work and innovation around lifetime income projections and the importance of moving beyond “nest-egg thinking,” many investors falsely believe that shooting for a magic number in gross retirement savings is the best way to ensure retirement success, suggests Rod Greenshields, consulting director for Russell’s U.S. adviser-sold business.
Greenshields notes that his work with Russell involves extensive meetings and collaboration with advisers in the retail and institutional channels. He finds advisers working in both segments are widely challenged by clients’ general lack of comfort and confidence in investing. Most advisory clients still think of the retirement savings effort as a race towards a finish line, he explains, but in reality no simple finish line exists.
“It’s the same fundamental challenge we all face—getting individuals to take charge of their savings and to understand the importance of planning for a lifetime of income, not just a lump sum at the retirement date,” Greenshields tells PLANADVISER.
Instead of fretting over the size of their nest eggs, the focus of individual retirement savers should be on what Russell calls the funded ratio, Greenshields says. It’s a term more often applied in the pension plan domain, to express a pension plan’s topline assets divided by projected benefit liabilities, but Greenshields feels the funded-status concept has wrongly been left out of most defined contribution (DC) plan discussions.
“If you ask a person out there whether they know what lump sum they’re going to need to live on in retirement, it’s not all that likely they’ll have a clear answer, or they will give you an estimate that is much lower than what they will really need,” Greenshields continues. “But if you ask them if they’ve ever heard of a pension plan being well-funded or underfunded, and whether they understand some of the problems a poor funded status can cause for the plan participants and beneficiaries, they get it.”
In the same way pension sponsors regularly evaluate their funded status to determine contribution requirements and asset allocations, Greenshields feels individual DC plan investors should be counseled to think about their own holdings and how they match up against anticipated long-term spending needs.
“As the adviser, your role can be to help the client understand that, if the client wants x-thousand dollars a year to fund a certain lifestyle in retirement, this translates to a y-dollar lump sum,” Greenshields explains. “And then you can build an action plan by looking at the age, wealth, gender, lifespan, income and the other relevant factors. The funded ratio simply allows you to compare how much you have against what will be required to generate that income stream you want.”
Greenshields says the funded status concept opens a door for the adviser to have a very personal conversation about the individual client’s situation. This strategy won’t fit into all advisers’ service models, he admits, but even DC plan advisers that don’t offer one-on-one participant advice can use the concept in their discussions with plan sponsors and other employer stakeholders. A DC plan’s aggregate funded ratio can be a powerful indicator of plan health and whether the plan is meeting the employer’s performance expectations, for example.
“Sponsors and advisers should realize it can really damage plan outcomes if participants aren't presented with anything like a funded ratio or an annual retirement income projection,” Greenshields says. “Without the funded status calculation, it’s all on you, as the investor, to decide how much you need. As we all know, that’s not an easy calculation.”