Products June 4, 2015

PSNC 2015: Plan Decumulation Strategies and Products

Income products are a hot topic for the retirement plan industry.
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Only 12% of retirement plans sponsors polled at the PLANSPONSOR National Conference in Chicago on Wednesday offer a retirement income product. 401(k) plans are generally not annuitized at this time so it’s mostly up to workers to figure out how to try to make their money last through their lifetime.

Shale W. Latter, retirement plan consultant for CapTrust Advisors, says, “By comparison, old-fashioned defined benefit [DB] pension plans, which fewer workers have today, guarantee lifetime payouts, and the default payout is a joint and survivor annuity.”

But with DB plans “flat lining” and the first major wave of Baby Boomers retiring, the industry overall needs to figure out how to help defined contribution (DC) participants go through the transition from a salary to the decumulation phase of their retirement savings.

What options can be offered to defined contribution plans besides lump sums, which all plan sponsors offer? According to Latter, the first step is to identify which of three different camps plan sponsors are in.

  1. The plan sponsor wants no involvement with participant’s retirement decumulation. For these sponsors, Latter says, it would still be relatively simple to add a feature offering systematic periodic withdrawals. 
  2. The plan sponsor wants to help, but not within the plan. For these sponsors, Latter says, adding a non-guaranteed managed payout fund would make sense. This is an out-of-plan annuity option but the sponsor can be the catalyst to educate participants, and participants can receive institutional pricing. 
  3. The plan sponsor is interested in helping their participants. They can offer a guaranteed income product within the plan. There are many options available. 

Next: The conversation on income products gains traction. 

 

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Gordon Tewell, principal of Innovest Portfolio Solutions, says although some solutions are available, “the evolution of these products still has a long way to go—this is a hot topic in the industry.” 

Glenn Dial, head of retirement strategy at Allianz Global Investors, suggests that with DB plans, participants know their projected numbers can be counted on. Many DC plans now offer income projections on participant statements, but these numbers are only 80% reliable.” 

The importance of having a participant’s target date fund (TDF) or qualified default investment alternative (QDIA) aligned with their retirement income solution is important. “Make sure your mathematical glide path matches your human glide path,” Dial says.

A participant can buy an annuity outside the plan, but as participants go through the retirement transition phase they will most likely want to use an adviser. “It’s a lifetime of money, so having a sit-down is very important,” Dial says.

Dial stresses the importance of the industry getting its arms around retirement income products. “What you want to give participants is optionality,” he says. “We don’t know what they want. You want to give them optionality to buy whatever income units they want to buy.”

“Cost is a big hurdle plus most guaranteed products have portability issues. We still haven’t seen the evolution of products that plan sponsors are ready to adopt,” Tewell says. 

What will it take to make these products more acceptable?

Tewell says, “For one thing, it would be nice to see how you can buy a product and get the money they say you will get. A lot of participants are uncertain and therefore are working into their 70s. They aren’t retired because they don’t know how much to spend. The quicker we can get people into products, the better.”

Another reason plan sponsors avoid these products is that they are unsure of their fiduciary responsibilities. The IRS and the DOL issued a notice in 2014 enabling qualified DC plans to provide lifetime income by offering a series of TDFs that include deferred annuities, but existing products do not fit into place with this rule. 

Plan sponsors and providers are looking for a safe harbor for guaranteed products. They are asking for more clarification from the IRS and the DOL so that they can feel more comfortable defaulting participants into these products.

Diversions June 4, 2015

Secret Questions Can Be Easy to Break

Personal knowledge questions may defeat their own actual purpose of maintaining account security.
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Personal knowledge questions (a/k/a “secret questions” or “challenge questions,” among other names) are supposed to help protect your online information and accounts. The theory is that the answers to these questions stay in your head (and nobody else’s) longer than passwords.

But a recent study, “Secrets, Lies, and Account Recovery: Lessons from the Use of Personal Knowledge Questions at Google,” reveals that these questions may in fact be weak safeguards. Taking a deep dive into how and why people choose the answers they choose—and how well they recall their own answers—two researchers at Google examined the first large real-world data set on the security and memorability of personal knowledge questions from their use at Google.

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Attacks against secret questions are a real risk for a host of reasons. First, many users share common answers. In a single guess, an attacker stands a 19.7% chance of guessing English-speaking users’ answers for the question “Favorite food?” Also with a single guess, an attacker has a 3.8% chance at guessing Spanish-speaking users’ answers for “Father’s middle name?”

Questions that are more secure have worse recall than unsafe questions: their answers are simply harder to remember. For the English-speaking population, the question “Father’s middle name?” had a success rate of 76% overall; the potentially safer question—because it would be harder to guess correctly— “First phone number?” had a 55% recall. And the potentially safest questions of all have abysmal recall: “Library card number?” has a 22% recall and “Frequent flyer number?” has only a 9% recall.

The harder to remember, the worse the recall for a security question to get the password prompt from a website login. So choose “father’s middle name”—not “frequent flyer number.”

Among the findings:

  • The ability to remember an answer decreases significantly over time. The success rate for “Favorite food?” was 74% after a month, but dipped to 53% after three months. A year later, it was barely 47%.
  • Questions that are supposedly more secure because of the expectation that each user has a different answer can fail because people sometimes deliberately provide untruthful answers. They give untruthful answers to secret questions either to make the answer harder to guess (37% of the 1,500 respondents) or easier to remember (15%). Ironically, it does neither.
  • Nearly all questions are potentially vulnerable to trawling attacks, where an attacker makes a few guesses of common answers for a large number of accounts in hopes of compromising a significant number of random accounts.

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