Decumulation Is Personal

Art by Miriam Martincic

The passage of 2019’s Setting Every Community Up for Retirement Enhancement Act put a spotlight on the need for retirement income solutions.

With the SECURE Act, federal lawmakers made it easier for plan sponsors to consider using insured retirement income solutions within defined contribution plans. Investment advisers, plan sponsors and recordkeepers are now working to take advantage of the SECURE Act’s pro-income provisions. Sources say their goal is to deliver a more customized approach to income and to deliver solutions that will continue to evolve over time.

Participants Feel the Pressure

According to the Schroders 2022 U.S. Retirement Survey, among nonretired survey respondents between ages 60 and 65, as many as 55% don’t believe they will be able to replace 75% of their last paycheck in retirement income. Many people anticipate needing less in retirement, but as much as one-quarter of respondents in this age group said they have no idea how much money they will need in retirement. A majority of respondents said they were concerned or “terrified” about losing their regular paychecks.

What’s more, approximately half of all retirees surveyed said they don’t have any strategies to generate retirement income and instead withdraw money as needed.

Survey data show that as a result of these concerns, there is significant demand for in-plan retirement income solutions and advice. Approximately half of survey respondents said their retirement plan offers some type of retirement income solution. Among those who have that option, 89% said they plan to use it and stay in-plan at retirement. Survey respondents further said the features they think would be most helpful for a retirement income solution include lifetime income, a consistent monthly check, low total cost, access to cash when needed and insulation from market volatility.

These findings are in line with what Wei Hu, head of financial research at Edelman Financial Engines, has been hearing from advisers, plan sponsors and individuals.

“There are a lot of issues that people can face in retirement that are very hard to plan for, so when you start asking them how much income they think they need, it’s not always clear,” he says. “Beyond just basic expenses, people worry about health care costs, and more recently they are worried about the impact of inflation. There are a lot of unknowns that individuals have to navigate.”

In June, Edelman announced the launch of a service called Income Beyond Retirement, a retirement income solution designed for 401(k) plan participants who are in or near retirement. The solution combines portfolio management with financial adviser support to create personalized retirement income plans and investing strategies to match the individual needs of employees. Near-retirees age 55 and older are offered a meeting with an adviser to develop a plan that manages their anticipated needs while planning for the unexpected. The results are individualized based on what a person has already accumulated and when they might plan to take Social Security.

Building the plan at around age 55 can provide enough lead time for participants to consider issues such as when to claim Social Security benefits to get the best paycheck they can. They may also begin thinking about whether and when they want to annuitize all or a portion of their retirement savings to provide consistent lifetime income.

“The core issue with retirement income is that no individual retiree is the same, so we wanted to be able to offer something that is very customized,” Hu says. “There are a lot of tools that can be used for retirement income, and we believe it’s important for participants to sit down with an adviser and determine what the right tools are for each situation.”

Transforming the Defined Contribution Space

While solutions like Edelman’s IBR are a start, they may not go far enough.

Mikaylee O’Connor, a defined contribution strategist at PGIM DC Solutions, says plan sponsors and recordkeepers will also have to transform how they approach retirement.

“Since its inception, the defined contribution space has been focused on accumulation and not decumulation,” she says. “When we talk about retirement income, we’re really talking about shifting the defined contribution plans from savings plans to retirement plans. That’s going to look different than what most people are used to.”

In O’Connor’s view, success on this front will involve a fair bit of education for plan sponsors and advisers. While investment-driven income solutions are not new to the advisory space, other products, such as annuities, are. In the past, many advisers have avoided this space because of its complexity and potentially high fees. This will change as the product set evolves alongside client demands, she says.

George Fraser, managing director of Retirement Benefits Group, agrees.

“It’s important for people to understand that there are a lot of options for how to handle the retirement phase,” he says. “Annuities have a bad rap because they are expensive and complex. In the past, they have come with a pretty hard sell. But the industry is working on cost and complexity, and we are seeing more flexibility make it into annuity contracts and structures.”

Retirement Benefits Group includes annuities as part of the retirement income solutions they offer to plans and individuals, and Fraser says that much of the work that needs to be done right now is educational.

“We have a lot of good options, but there isn’t always a lot of transparency, which can make it difficult for plan sponsors to evaluate everything that is available and make a choice for the plan,” he notes. “I spend a lot of time talking to plan sponsors about how to steadily increase retirement contributions within plans and then also provide people with options for what to do when they retire. There’s a lot of fear out there because people don’t know what’s available—but it doesn’t have to be that way.”

As PLANADVISER recently reported, Nationwide found that advisers are getting more comfortable with using a variety of annuity types as retirement income solutions for themselves. These include variable annuities with living benefit riders, in-plan income guarantees, single premium immediate annuities and longevity insurance/deferred income annuities. Each of these options can provide lifetime income, but there is more flexibility in terms of when people might choose to annuitize all or a portion of their retirement savings and how benefits are paid out to individuals. As the regulatory environment shifts to accommodate insurance solutions in 401(k) plans, more of these solutions could end up in individual retirement plans.

O’Connor says it will be important for plan sponsors and individuals to look not only at the annuity solutions but also at alignment of interests.

“Plan sponsors will have to think critically and make sure they are using trusted partners. They can engage with advisers to identify the best choices,” she says.

Hu adds that timing often plays into picking the right income solution.

“We do a lot of work looking at when people think they might want a lifetime income guarantee,” he says. “We provide a lifetime income solution that people can opt into, but they aren’t required. With the current offerings available, you could also wait until you are somewhat far into retirement and then use income solutions to manage longevity risk. People tend to worry when they feel like they locked into a given option. They want flexibility, so we emphasize the importance of looking at lifetime income within the broader portfolio.”