PA: Can you tell us about guaranteed products in a retirement plan?
Dial: A guaranteed investment is essentially insurance or, more specifically, an annuity. That’s the only way to eliminate longevity risk, the risk of outliving your income.
Some target-date fund providers say that if you stay in their funds past retirement, then there’s a 95% chance you won’t outlive your assets. The problem with that assertion is that the remaining 5% poses a significant risk. Framed another way, it means that in one out of every 20 years, retirees won’t be able to pay their bills. When it comes to retirement income, reliability is far more important than probability. Nothing should be left to chance.
At Allianz Global Investors, we’re looking at how to get a more predictable stream of income—whether that’s in-plan or out-of-plan. And getting the structure right is challenging. One reason is the existing infrastructure. The individual retirement account (IRA) rollover market is already well-established, so new entrants will struggle to achieve scale. In a defined contribution plan, mutual funds, including target-date funds, are set up so that when plan participants reach retirement, they withdraw their accumulated savings and purchase some sort of retirement-income investment.
But that transition leaves investors exposed to interest-rate fluctuations, or transition risk. So the question is, how do you manage that transition risk with an out-of-plan investment option? In-plan, you’ve got the ability to guarantee a portion of your income before age 65. But there are challenges in terms of portability and cost.
PA: Can you explain how transition risk can hurt plan participants?
Dial: Sure. I’ll give you a hypothetical example. Let’s say a company decided to mandate that its employees buy an immediate annuity when they retire. But then interest rates fell sharply. So, if you retired today with the same amount of money as plan participants did five years ago, then the amount of guaranteed income you could buy as part of your policy would be significantly lower. At Allianz Global Investors, we’re able to tap our in-house risk management capabilities to help plans manage transition risk and achieve a stable income stream for their participants.