Data & Research February 28, 2008

Participants Clueless about Retirement Income Options

The majority of retirement plan participants are not familiar with products that can provide them with a guaranteed income stream in retirement.
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A recent survey from The Spectrem Group finds that, overall, 42% of retirement plan participants say they have given the issue of how they will arrange to have a regular income paid to them in retirement more than a passing amount of thought. Those over age 55 were the most likely to have spent time considering how to provide their retirement income (59%), while those under age 45 and those with account balances of less than $10,000 have spent the least amount of time considering the issue.

About half of all participants have done some research into the issue of arranging for retirement Income, and about half of this group have discussed the issue with a professional financial adviser or have read articles in the media, the Spectrem report said. Additionally, 40% each have discussed it with family or friends or conducted online searches regarding the topic. Those most likely to have researched the issue include older participants, men, and those with account balances or household incomes in excess of $100,000.

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However, fewer than 20% of plan participants say they are very familiar with any of the four alternative approaches for arranging retirement income payments included in Spectrem’s analysis: systematic withdrawal plans; immediate pay annuities; structured bond portfolios; or laddering certificates of deposit. One-third say they are not at all familiar with systematic withdrawal plans or immediate pay annuities and over half are not at all familiar with structured bond portfolios or laddering certificates of deposit.

After seeing a definition of each of the four approaches, 45% of respondents say they would seriously consider a systematic withdrawal plan; 30% would consider laddering CDs; 24% would consider an immediate pay annuity; and 22% would consider using a structured bond portfolio. However, after seeing a statement of the drawbacks to each of these approaches in addition to the definition, the proportion who would seriously consider any of them dropped by one-third or more and half of the respondents did not select any of the four approaches as one they would seriously consider.

Spectrem also found that ensuring that a market or economic downturn does not cause a reduction in their retirement income is the objective ranked most important by plan participants, followed by minimizing the possibility of outliving the assets available for retirement.

Over 80% of participants indicated they see Social Security and a defined contribution plan balance as resources they will have in fund retirement income. In addition, 40% – 50% also reported that they will have a defined benefit plan, an IRA, equity in their primary residence, and after-tax household savings and investments available.

Among those with equity in residences, just 24% say they plan to sell their primary residence and 41% plan on selling their second or vacation home. Over 90% of those with investment real estate say this asset will contribute 40% or less of what they need to fund their retirement income.

The Spectrem findings were based on responses of a total of 402 retirement plan participants age 35 or older who were surveyed in the fall of 2007.

Perspectives February 28, 2008

Perspective: Turning Automated Rollovers into a Win-Win

As U.S. workers continue to change jobs at an unprecedented rate (experts say it’s now up to 20 percent annually), the retirement accounts they leave behind with previous employers become a major problem for plan management professionals.
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These “orphaned” accounts create a fertile ground for inefficiencies and ineffectiveness – a “Plan Performance Gap” that limits financial results while increasing fiduciary risks, plan costs, and administrative burdens.

Furthermore, the Pension Protection Act, which was designed to protect and encourage retirement savings, may make the situation even worse. One of its provisions removes barriers and adds incentives that encourage employers to automatically enroll their employees in defined contribution plans. As more employers take advantage of auto-enrollment, the number of orphaned and inactive accounts will grow. This is likely to reduce the average participant account size, thus making plans less attractive to service providers and creating a bigger Plan Performance Gap.

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There are two ways employers and their advisers can turn this potential problem into an opportunity. The first is by helping participants roll over money held in previous retirement accounts into their current plans. This not only increases the average account size, it also helps participants manage their retirement savings more effectively.

The second strategy is to help former employees move their money out of the plan. This goal can best be achieved by giving participants access to third-party advice and support as well as quality, low-cost IRA options.

Retaining the balances of former employees substantially increases the amount of work required to service the plans. Because these terminated employees often have low-balance accounts, they are major contributors to the Plan Performance Gap. This is especially significant for companies with high turnover. One such company was able to reduce fees by more than $750,000 annually by adopting a pro-active rollover strategy. The plan manager used an outside service provider to administer the process, which involved some 70,000 inactive participants. Because 62,000 of them opted to roll their savings into other accounts, the administrative burden associated with finding and contacting former employees was greatly reduced.

In reality, everyone is a winner with automated rollover.

  • Plan sponsors reduce their administrative burden and liability exposure, increase average account balances, and realize true cost savings.
  • Participants are able to consolidate account balances in one place, making it easier to monitor and manage retirement savings.
  • Advisers and TPAs can improve revenue, differentiate their practices, and enhance their value to their clients. In addition, they can structure the process so that they maintain relationships with those participants who have the highest balances and outsource the less profitable accounts.

Finally – if the process is handled in the right way, with high-touch, personal support – participants receive the education, assistance, and encouragement they need to stay invested in retirement.


Spencer Williams is president and CEO of RolloverSystems. Spencer joined RolloverSystems in 2007. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual from 1997 to 2007, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and most recently in a leadership role in starting and building the company’s retirement income and rollover IRA lines of business.

© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be construed with investment advice.

 

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