The Retirement Income Question

Can managed accounts give participants the planning help they need?

Art by Alex Eben Meyer

There’s talk about managed accounts as a potential solution to participants’ need to plan for their retirement income.

The accounts can work well for a couple of reasons as a way to help pre-retirees and retirees with income planning, says Wei Hu, vice president of financial research at Edelman Financial Engines in Santa Clara, California. On the investment side, an Edelman managed account can be personalized to reflect how much a participant near or in retirement wants to focus on income-oriented investments versus growth, he says.

“And a managed account is really an advice program, where we’re helping people assess a lot of questions beyond ‘What is the right investment allocation for me?’” Hu says. “We’re helping people think about questions like, ‘What if I retire earlier or later than I originally planned?’ And ‘When should I start taking Social Security?’ We’re helping them develop an overall retirement income plan that factors in their particular circumstances.”

Fidelity Investments’ workplace managed account service can provide individualized help with retirement income planning and an investment portfolio that aims to meet a participant’s income needs in retirement. Using online tools and/or talking with a Fidelity staff member, participants can receive guidance to help make decisions such as at what age to retire, what is a reasonable post-employment budget, and how much they can withdraw from their account annually.

As a first step when a participant close to retirement wants to start planning for retirement income, Fidelity helps that person look at where she is now with accumulated assets and anticipated expenses, says Lorianne Pannozzo, senior vice president, workplace personalized planning and advice at Fidelity in Boston. “We talk about, ‘When do you plan to retire, and what does that retirement look like?’ And we have a retirement income conversation, really focusing on planning for essential expenses versus discretionary expenses in retirement,” she says.

Fidelity has tools to help participants model how retiring at different ages can influence how much money they are expected to have available to spend annually in retirement. “We also have data about many other individuals in similar circumstances, and we can provide a participant with [aggregate] benchmarking data on what expense level other, similar participants have in retirement,” Pannozzo says. “We can show someone data that says, ‘Here’s what the average person your age and with your circumstances might spend annually in retirement.’ Then we can discuss, ‘Do you anticipate spending more or less than that?’” Once a participant has firmed up a post-employment budget, she says, Fidelity can work with that individual to evaluate various drawdown strategies, to determine which will best provide the needed income now and into the future.

At Edelman Financial Engines, more than 130 401(k) plans now incorporate its Income Beyond Retirement solution for participants ages 55 and older, which it introduced last June. The IBR program does not have an additional fee.

IBR aims to help a participant in an Edelman managed account through the transition to an income-focused portfolio allocation, allowing for a mix of income and growth allocations, depending on the person’s retirement objectives. The program also aims to help the participant develop a personalized retirement income plan that takes into account the person’s assets and budgeted expenses. “It helps put together a plan that ultimately says, ‘Here is what the investment allocation that works best for you is, and here is how much annual spending you should be able to afford in retirement, given what you’ve told us,’” Hu says.

The program does not include a retirement income product, instead focusing on the individual’s retirement-preparation phase. It starts with what Edelman calls a Retirement Checkup, which helps a participant understand if he is on track with retirement savings and what levers he can choose from to pull to improve his projected outcome—e.g., saving more or working one or two years longer. IBR then helps model a retirement income plan that factors in several different types of risk, including inflation risk, interest rate risk, longevity risk, market risk and sequence of returns risk—the risk of seeing low or negative returns as someone enters retirement.

“Ultimately, this is to help come up with a more realistic plan for households,” Hu says. “The major new thing with Income Beyond Retirement is a more explicit modeling of longevity uncertainty, which is really as big a risk as market risk. It helps people look at, what are the chances that you can sustain a given level of spending for the rest of your life, taking taxes into account?” A participant can utilize online tools and/or talk by phone with an adviser on the Edelman Financial Engines staff, he says.

Barbara Delaney, founder and principal in StoneStreet Renaissance, a part of Hub International, in Pearl River, New York, says she has spoken to all of her sponsor clients in recent months about helping their participants make plans for their retirement income. She worked closely on the development of a partnership, announced last year, that will allow participants in a Morningstar Investment Management managed account to incorporate a guaranteed-income product purchased through Hueler Income Solutions’ outside-the-plan marketplace.

According to Delaney, as of late January, six Hub plan clients had signed on to start offering the solution on July 1. She says talks continue with all of the major recordkeepers about incorporating the Morningstar/Hueler solution and that some recordkeepers are more enthusiastic about allowing it on their platform than are others.

To make the process simpler and more understandable for participants, she says, Hub advisers can help guide a participant via one-on-one meetings to think through their retirement vision, their retirement assets and their retirement expenses. Delaney says it has been working well to do that via Zoom. Participants also will be able to talk with Morningstar about questions such as what percentage of their portfolio they might consider putting into a guaranteed-income product, given their specific goals and circumstances.

“It’s a decision that’s very personal, and it can’t be automated,” Delaney says. “My clients don’t want their participants to be sold a product: They want to help guide participants through the decisions they need to make about their retirement income.”