The offering, called Income+, is already in operation with Aon Hewitt, and, according to Financial Engines brings to bear a money management approach that doesn’t seek to maximize return, but rather to create a floor amount of income. It does so via an income glidepath that, approximately five years before retirement, shifts the participant portfolio allocation from growth-focused to one that is income-focused.
“We’ve all been told how to put money into our 401(k)s, but nobody’s helped us take money out of them until now,” explained Jeff Maggioncalda, president and CEO of Financial Engines. “Any successful 401(k) retirement income solution must meet the needs of both employees and employers, so we designed Income+ to provide flexibility and safety for employees and still be safe and easy for employers to implement.”
The Income+ feature is available to participants in Financial Engines’ managed accounts program at no additional cost, and it does not require employers to add an annuity or change the fund line-up in their plan. Additionally, as part of a managed account structure, it can continue to provide employers with a qualified default investment alternative (QDIA) safe harbor. According to Financial Engines, the program gives employees control of their money, which stays in their 401(k) account and “doesn’t lock them into a particular investment or insurance product”. Participants can start payouts, stop payouts, and take additional withdrawals at any time, and they can cancel at any time with no fee or penalty.
Dr. Jason Scott, Managing Director, Retiree Research Center at Financial Engines explained that in discussing product design options, participants expressed an interest in three basic concepts; payouts that were steady and didn’t run out, the potential for upside growth in their savings, and full access to their money – elements that are not always addressed in many current retirement income designs.
How it Works
Roughly five years before retirement, an “income checkup” is scheduled with an adviser to establish payout needs and requirements. The payout range depends on current term structures available in the plan, Scott told PLANADVISER, noting that while that is now in the 4% range, that can change over time as circumstances warrant.
As with its managed account offerings, Financial Engines constructs an income oriented portfolio from the options already available on the retirement plan menu. The income portfolio is invested in bond funds (about 65% of the total portfolio at retirement), targeted at providing payouts throughout a participant’s retirement, or at least up until age 85, at which point the account could be annuitized. Maggioncalda said that Income+ can even work with an in-plan annuity option, if one is in place, or added.
Upside potential is provided by the 20% or so invested in equities, and gains are realized along the way to retirement, moving those proceeds to the floor portfolio, and layering on a new layer of bond investments. If there is a market drop, and thus no increase in the value of the portfolio, you still have the value of the floor portfolio, according to Financial Engines. The firm notes that those steady monthly payouts are designed to last for life and are “unlikely to go down when the market drops but are likely to go up when the market rises”.
Financial Engines says that four large employers have agreed to offer Income+ to more than 200,000 employees, and that a FORTUNE 20 financial services firm administered by Aon Hewitt has been offering Income+ to its employees since the fourth quarter 2010. In addition to Aon Hewitt, four other 401(k) providers have agreed to make Income+ available to their clients over the next year; ACS -- a Xerox Company, ING, J.P. Morgan Retirement Plan Services and Mercer.