Retirement Income Options

Art by JooHee Yoon

From his seat on the Institutional Retirement Income Council (IRIC), John Pickett sees what he calls “the next frontier of the DC [defined contribution] business”: systematic distribution for participants from the retirement plan. And, as with automatic plan design, advisers are in a key position to urge plan sponsors to embrace it.

The industry has realized that using “auto” features to solve for employees’ inertia and investment fears, then “saying, ‘Where do we send your IRA [individual retirement account] rollover?’ doesn’t quite make sense,” says Pickett, also a senior vice president with CAPTRUST in Dallas.
He says advisers who have yet to “sit down with their plan sponsor clients and say, ‘Let’s look at the distribution options,’” should do so.

There are a growing number of strategies an adviser can suggest: guaranteed minimum withdrawal benefits (GMWBs), various annuity products, managed payout services—even an institutional platform offering competing providers’ annuities in the form of IRAs—among others. Advisers should be well-versed in each, he says.

A good place to start is with a managed account provision, to let near-retirees customize their holdings from their target-date fund (TDF), he says. Financial Engines or Morningstar, for instance, will still manage an owner’s account once he has retired, plus help him with the drawdown, Pickett says. Another benefit: Though sponsors typically supply just one drawdown option, by offering a managed account besides, they effectively offer two, he says.

A procedure many plans now allow is taking systematic withdrawals—which keeps the retiree’s money in the plan, potentially to grow. Most recordkeepers will make these periodic payments and do not charge a fee, he says.

As to products, sponsors can choose from a range of annuities, with the payout being guaranteed or nonguaranteed, immediate or deferred, variable or fixed—or a combination of the above—and may include the spouse.

“Everything has its trade-off,” says Doug McIntosh, vice president, full service investments, at Prudential Retirement in Hartford, Connecticut, as to which insurance product can work best. In all of them, participants lose control of their assets—a major participant concern, he says.

Plan sponsors are known to have concerns, too, including their lack of a safe harbor when selecting these products or a product’s non-portability when its owner changes jobs, he says.

The GMWB, an annuity-type product, addresses some of these issues by letting participants withdraw their assets penalty-free. It works well within or coupled with a plan’s qualified default investment alternative (QDIA), he says. “It’s a vehicle that’s easily understood and gives participants a maximum amount of flexibility.”

Annuities have no explicit fees, he says. Those are “effectively taken care of by the pay-out ratio offered by the underwriter.” GWMBs, valued daily, have an underlying asset management fee, which varies based on the management—whether it is an index fund or balanced portfolio, he says. Fees for the investments range from 20 to 60 basis points (bps); on top of that asset management fee, the guarantee fee is about 90 to 100 bps, he says.

While an adviser can make revenue off some of the insurance products, says Pickett, the main value in offering lifetime income strategies, in general, is competitive. “Advisers can say, ‘I know more than just recordkeepers and mutual funds. I can help you make this decumulation strategy.’”