At the “Unlocking the Retirement Income Dilemma” panel at the 2019 PLANADVISER National Conference, Rick Fulford, executive vice president and head of PIMCO’s retirement and defined contribution business for PIMCO U.S., said advisers need to begin to think seriously about retirement income solutions.
“Individual products in and of themselves are only a small piece of the equation,” Fulford said. “What retirees are trying to achieve is to maximize income while minimizing risks. They are dealing with interrelated decisions about when to retire, how much money they will need, whether or not they should purchase an annuity, and what withdrawal strategy they should use. Advisers need to help participants make optimal decisions.”
One major impediment to addressing retirement income right now is that “plans were not set up to serve retirees and there is a dearth of personalized advice, tools and education” on the subject, Fulford said. Where advisers can start, he explained, is by helping participants decide when to begin taking their Social Security benefits, a “decision that is critically important.” Today, “only 15% of Baby Boomers have a defined benefit plan. That is down dramatically.” As a result, “Social Security will make up 30% to 40% of many people’s retirement income pie,” he said.
Today, 67 is the full benefit age, Fulford said. If a person retires at age 65, they will only receive 80% of their potential full benefit, he said. If they wait until age 70, they will get 120%. The question is, can a person wait those years out in retirement without earning any income? If they can and are in good health, it is best to defer as long as they can, he said. Unfortunately, however, 90% of people take their Social Security benefits before age 67, and 50% take it at age 62, the first age at which it becomes available. At that age, they will only receive 70% of their retirement benefits, he noted.
As for purchasing an annuity, PIMCO believes the best approach is for someone at age 65 to purchase a deferred annuity that starts at age 85, with them using 10% to 15% of their savings balance to make the purchase, Fulford said.
“The problem is that only 5% of plans offer an in-plan annuity, and even when it is available, only 2.5% of people use them, according to LIMRA data,” Fulford said. According to EBRI data, 45% of people want self-managed, non-guaranteed income, he noted. Only 9% want a single guaranteed income product, and 20% want a combination of the two.
There are other forms of income available by way of dividend-paying stocks, bond coupons, Social Security and defined benefit plans, he said.
As for what plan sponsors think is the right approach to in-plan retirement income solutions, a survey by Cerulli found that 24.5% want a fixed income mutual fund, 22.5% want a target-date fund, 13.7% a managed account, 12.7% a dividend-paying equity mutual fund, 10.8% an annuity product, 8.8% a managed payout fund, and 5.9% a target-risk fund. Fulford said he is hopeful that through-retirement target-date funds will evolve to include a retirement income component.
Another practical solution advisers can suggest to their plan sponsor clients is for them to amend their plan documents to permit participants to take systematic withdrawals, Fulford said, noting that Vanguard data shows that 87% of sponsors only allow for lump-sum distributions. And should a plan permit systematic withdrawals, most recordkeepers charge a transaction fee, sometimes as high as $50 per transaction. This is something advisers should negotiate with recordkeepers to lower, he said.