Retirement Income: New Products, Old Challenges

Are target-date funds able to adequately provide a retirement income stream for participants?

That question was addressed at a panel at PLANSPONSOR’s recent Future of Asset Allocation Funds conference in Sarasota, Florida. New products are popping up every day to address the retirement income dilemma, but there are varied perspectives about the best products to implement and how to educate participants about them.

The retirement community lacks an adequate solution, said Stace A. Hilbrant, managing director of 401k Advisors, a National Retirement Partners (NRP) member firm. Overall, the industry does a “terrible job’ at providing retirement income for the average rank-and-file worker in America, he said.

Scott Warlow, assistant vice president for Strategic Asset Allocation at John Hancock, said that now that people are living 20 to 30 years in retirement, they face several risks, including longevity, inflation risk, and sequence of return risk. John Hancock is one company currently offering both an insurance product for defined contribution plans (Guaranteed Income for Life) as well as new managed payout products called Retirement Distribution and Retirement Rising Distribution (see “Funds Move to the Next Level’). Managed payout funds do not offer a guarantee, but rather wealth preservation with room for growth.

Several products in the insurance industry, such as John Hancock’s, have emerged in the last couple of years that embed into 401(k) plans in order to provide guaranteed income for life (see “The Inside Story’). Some of them can actually be utilized by participants in their 20s and 30s.

Steve Scanlon, head of global sales at AllianceBernstein Defined Contribution noted that it is unnecessary and costly for someone at 30 to implement a guarantee. He also said that the current products offered by individual insurance companies are not necessarily what plan sponsors are looking for, and a multi-insurer product embedded within a target-date fund—which AllianceBernstein is working on—would be a better fit. He said AllianceBernstein’s research found that the guarantee would help retirees invest in equities in order to produce adequate income, and that “most people will appreciate the confidence they have to invest even if they don’t use the guarantee.’

Henry Yoshida, a senior financial adviser at Merrill Lynch, said sometimes it takes education along with a nudge from the technology side to force participants to do the right thing. The challenge comes back to problems in the accumulation phase as well; participants need to be convinced to save enough in the first place.

Hilbrandt noted that a lot of responsibility is on the adviser right now. The vendor community has been trained to throw paper kits at participants, but advisers can help work with the “average American worker’ to buy an institutionally priced annuity, and not let the “wolves’ sell them a retail-priced annuity. “I challenge the adviser community to step up their education effort,’ Hilbrant said. “If we don’t do it, the government is going to do it.’