Finding the Right Vehicle
Retirement income is fast emerging as a key component in addressing the nation’s potential retirement crisis. As Baby Boomers reach traditional retirement age at an increasingly rapid pace, with the availability of retirement income sources such as pensions and Social Security under pressure, and doubts about the adequacy of voluntary retirement savings levels, people must find innovative ways to maintain their standard of living far beyond their working careers.
After years of promoting accumulation solutions, the retirement plan industry finally is ready to put more than lip service behind a focus on making the most of those savings accumulations when it is time to unwrap that 401(k). That already has brought a new generation of retirement income solutions to market—and that is an opportunity for financial advisers.
The Adviser Role
The successful 401(k) adviser of the future will recognize the need to focus on post-retirement income distribution, says David Macchia, Director of the Retirement Income Industry Association and Founder and President of Wealth2k, a financial software company. While there are many tools designed to facilitate post-retirement income distribution, advisers will need to embrace more complex investment strategies and utilize the products effectively to manage multiple risks, he says. “The answer is found not in a product but in a strategic combination of products,” Macchia says. “That means maintaining a level of diversification as well as bringing in products that provide guaranteed outcomes and hedging. Because the challenge in retirement is managing multiple risks, that requires multiple approaches.”
Retirement Income Products
As a result of their inherent complexity, and some resistance on the part of the buying public, financial advisers will play an essential role in introducing and integrating retirement solutions. Although 401(k)s, and IRAs, have an important place in retirement income, the industry now is embracing the idea that investments focused exclusively on accumulation are only part of the solution. The current trend, continuing to take the defined benefit designs into the defined contribution world, includes a movement toward products that provide Americans with a monthly paycheck of sorts in retirement. Products already capitalizing on this notion include traditional but tailored annuities, in-plan retirement income options, and distribution funds.
Although annuities are hardly new products, many providers are streamlining some of their options to be more appealing to the Baby Boomer retiree market. For example, AXA Equitable Life Insurance Company recently launched a new variable annuity—Crossings: My Lifetime IRAs—designed specifically as a rollover option for employees taking distributions from employer-sponsored retirement plans at Fortune 1000 companies.
A more recent innovation is the in-plan investment option and, while there are variations, effectively, it allows participants to invest in an annuity as part of their accumulation phase. John Hancock Retirement Plan Services offers its Guaranteed Income for Life (GIFL), an optional 401(k) rider featuring a principal guarantee in which participants invest their 401(k) funds in John Hancock Lifestyle Funds to create a benefit base, which then is used to calculate a 5% lifetime income amount at the time of distribution, which they receive for the rest of their lives. The Hartford’s Lifetime Income product offers shares that are worth $10 of income for the rest of an investor’s life beginning at 65.
Distribution, or income, funds are the newest products in the retirement income arsenal and, in the first quarter, there were new offerings from multiple firms, including Schwab and Russell Investments. The Schwab Monthly Income Funds are composed of three funds, each with a different annual payout target, varying from 3% to 6% of the amount invested. The Russell LifePoints Funds, Target Distribution Strategies, aim to provide retirees with a steady, but not guaranteed, annual distribution; for certain funds, the potential to preserve some savings; and the flexibility to make changes throughout retirement. Some of the Russell funds aim to offer distributions for 10 years from inception, while others are geared for 20 years of payments.
Selling Retirement Income
Advisers will need to put in place a process that lets them reach out to each type of participant, says Thomas D. Ming, President, Tower Rock Advisors, Inc. “From an adviser standpoint, [success comes from] the process that’s put in place to understand the demographics of the participants and set up plans that reach each type of participant’s investment goals,” he says.
Participants must decide on an investment strategy—such as whether to roll over into an IRA (with or without installment distributions) or purchase an annuity. “An investment [guarantee] is not absolute unless it is an annuity product,” says Rick Rodgers, Managing Director of the InSight Employee Benefit Communications division of Innovest Portfolio Solutions, LLC. Some investors want control over their investments and might choose installment distributions, he says, while others want the “cruise control, hands-free experience” of annuities, which is why it is important to understand the individual client. New products likely will add even more new opportunities to the mix.
Will this focus on post-retirement create a new avenue for advisers? It can and it should, says Macchia. Not only is it a great business opportunity for advisers, but they have a responsibility to plan participants. “I think there’s a segment of advisers that likely will move in concert with the great body of retiring people and will begin to use their positioning in a smart way and follow along to ongoing post-retirement solutions to that group of people,” he explains. “I don’t know how large that segment will be, but I think potentially it will be large and very lucrative.”
*Illustration by Morgan Blair