Sizing Up Retirement Income Options

With the pending retirement of the first generation to have most of their retirement savings—if they have saved—in defined contribution plans that for decades have focused on accumulation, attention is increasingly turning toward decumulation and sources of guaranteed income.

Longer lifespans, fears of potential Social Security shortfalls making the system unable to continue paying full benefits and a shift away from most Americans having a defined benefit pension fund are all contributing to the interest. Plan sponsors continue to search for means to evaluate—and leverage—the most prudent income offerings for their participants.

The Institutional Retirement Income Council of America and Manifest, as well as Equitable Holdings Inc., published guides with suggestions for evaluating and implementing retirement income options.

Last month, Equitable published a five-step fiduciary framework designed to help plan sponsors compare in-plan guaranteed and non-guaranteed income options. While plans are used to reviewing standardized criteria to evaluate default investment options, no objective standard exists for evaluating funds with guaranteed income, according to the firm’s report “Retirement Income at a Crossroads.”

Plan sponsors are encouraged to evaluate retirement income options based on factors related to their participant populations including the:

• Range of retirement outcomes through different longevity and inflation scenarios, market performance and risk of running out of money;
• Flexibility and liquidity, including consumption flexibility during retirement and at death;
• Volatility and variance of income, including exposure to market volatility and level of downside protection before purchasing retirement income and during retirement;
• Performance net of fees; and
• Simplicity, such as in the steps required to start earning retirement income.

Equitable’s report stated that establishing quantifiable measures for each of the criteria will help enable a “like-to-like” comparison when evaluating the spectrum of solutions for retirement income.

“When an investment committee looks at investment options that are not guaranteed income, they look at quantifiable, directly comparable metrics between ‘option A’ and ‘option B,’” says Ponni Vel, head of Equitable’s institutional and business ventures.  She uses the comparison of active and passive target-date funds as an example. “With guaranteed income, it’s [still a matter of] figuring out what metrics are directly comparable and quantifiable between different products.”

Meanwhile, IRIC and Manifest deemed another type of retirement income framework necessary—specifically, one to link the use of retirement income to participants consolidating accounts opened during their tenures with different employers.

According to the firms’ report, the fragmented account structure of the DC system remains a barrier to the adoption and effectiveness of in-plan lifetime income solutions. Last year, an estimated $1.77 trillion in assets was scattered across approximately 28 million lost or abandoned accounts, at least some of which could have been invested in lifetime income products for participants desiring to use them. The companies reported that participants who consolidated their accounts increased their retirement savings by 26% over 10 years due to lower cash-out risk, reduced fees and higher ongoing contributions.

“The industry has developed advanced income solutions, but we have not yet established the foundation those solutions need,” said Kevin Crain, IRIC’s executive director, in a statement. “Without the ability to view a participant’s complete retirement picture, income modeling accounts for only a part of their actual wealth, making withdrawal sequences inefficient and income projections incomplete.”

IRIC and Manifest suggest a three-layer framework on which plan sponsors can focus:

• Consolidation and visibility: finding and aggregating retirement accounts from past employers to create a complete picture of all retirement assets and allocation lineups in the accounts;
• Optimization: providing holistic income modeling, Social Security integration and tax sequencing; and
• Implementation: setting up an income menu that is operational for the participant.

The report recommends plan sponsors more specifically evaluate the account consolidation features their recordkeeper currently provides and review participant adoption rates; use technology tools to supplement the current recordkeeping process as needed; evaluate providers based on how those companies manage consolidated versus single-plan data; and incorporate aggregation metrics into their plan health reports to hold themselves and their providers accountable for consolidation progress.

The latest reports come as last month, the IRIC and the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute also launched the Defined Contribution Retirement Income Solutions Framework, to help plan sponsors, advisers, consultants and fiduciaries compare retirement income products available to defined contribution plan sponsors.