Data & Research February 18, 2014

Pre-Retirees Need Strategies for Withdrawing DC Assets

A new study finds 27% of U.S. workers ages 55 to 64 say they do not know how they will use their defined contribution (DC) plan savings after they retire.
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According to the study from LIMRA Secure Retirement Institute (LIMRA SRI), women are much more likely than men not to have planned how they will use their DC assets (38% vs. 19%).

“It is surprising that such a large proportion of older workers have failed to do this basic level of income planning when most are within 10 years of retirement,” says Matthew Drinkwater, associate managing director, LIMRA SRI Research. “Many believe that they can delay retirement indefinitely, or work in retirement, so it’s possible they feel that there’s no near-term need to engage in this kind of planning. But that belief is risky; people often retire earlier than anticipated. It makes sense to give thought to how you will use your DC plan balances sooner rather than later.”

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Two-thirds of workers ages 55 to 64 indicated they plan to make withdrawals—either directly from their DC accounts or after rolling over the assets into an individual retirement account (IRA). Only one in six say they plan to convert some or all of their balance into a guaranteed lifetime income.

While 24% of workers age 55 to 64 who have developed specific income-generation strategies report they plan to take systematic withdraws from their retirement savings, nearly two-thirds (65%) say they plan to withdraw money on an occasional basis or when needed.

Among those who have no specific income strategy, simple procrastination is the top reason given for not yet creating one (42%). Around one-quarter each say they will have enough income from Social Security and pensions to meet their household expense needs (27%) or they are not yet close enough to retirement to create a strategy (24%).

“Going through the planning process during the pre-retirement years may prompt changes in their savings behavior, how they allocate their assets or the decision to purchase other retirement products,” notes Drinkwater. “Ultimately, our research has shown that people who take the steps to plan for retirement are more likely to feel more confident in their ability to be financially secure throughout their retirement.”

Products February 18, 2014

New Guide Supplements DOL TDF Tips

The Defined Contribution Institutional Investment Association (DCIIA) has released a white paper titled, “DCIIA Guide to U.S. Department of Labor Tips on Selecting Target Date Funds.”
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The paper is intended to supplement the Department of Labor’s (DOL’s) fact sheet about selecting target-date funds (TDFs) and offer additional information about the different types of products that may be available.

DCIIA says it expects plan fiduciaries will find the DOL’s target-date fund fact sheet to be a useful tool. It is written in clear, non-technical language and includes steps that plan fiduciaries can easily understand.

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There are many options for plan fiduciaries to consider when deciding whether to incorporate a TDF into an investment lineup. In its fact sheet, the DOL emphasizes that considerable differences exist among TDFs; it points out the need for plan fiduciaries to understand the principal components of the various TDF strategies, as well as the primary differences among them, and to consider these factors when determining which, if any, TDF would work best for their plan. Several of the central differences—glide path and portfolio construction, off-the-shelf versus custom, type of investment vehicle underlying the strategy, and cost—are discussed in DCIIA’s white paper.

Lew Minsky, DCIIA’s executive director, comments: “A good starting point for plan fiduciaries when reviewing TDFs is to note that, while there are many variations among these funds, generally they all seek to offer: diversification among asset classes; professional fund asset management pre- and post-retirement, and reduced exposure to equities as participants near retirement age.”

These features, as well as the fiduciary protections available when one of these funds is offered as the plan’s qualified default investment alternative (QDIA), may make a TDF a prudent choice for both a plan fiduciary and plan participant. As an alternative to a TDF, some plan sponsors may choose another type of QDIA, such as a managed account or a balanced fund.

Each plan’s unique characteristics and circumstances will help inform an appropriate selection in which a wide range of product choices is available. Investment performance, level of diversification, cost and consistency with the plan’s objectives are key factors in default investment selection. Whatever the choice, both adhering to a selection process and documenting the decision are critical.

In March 2013, the DOL offered general guidance to assist plan fiduciaries in selecting and monitoring TDFs (see “Incorporating DOL TDF Tips into Your Processes”).

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