Employees need to follow the retirement money
It’s time for employers to stop focusing all of their retirement plan efforts around saving for retirement and begin offering ways to help workers access that money when they do leave the workforce.
The Institutional Retirement Income Council, a nonprofit think tank for the retirement income planning community, believes plan sponsors should consider adding de-accumulation options to their defined contribution retirement plans, such as annuities, installment payments or periodic payments. Since defined contribution plans have replaced defined benefit pension plans as most workers’ main source of retirement income, it makes sense to give them options for how to turn their accumulated wealth into income in retirement, says the think tank.
“De-accumulation strategies are the natural next step in the evolution of retirement plan offerings,” says Robert Melia, vice president, product development, retirement plan services at Lincoln Financial Group and an IRIC advisor who co-authored the report. “While adding de-accumulation options can be beneficial to both plan sponsors and employees, the process of evaluating whether to offer one and which options make the most sense for an organization and their plan participants requires careful consideration.”
As an official for an insurance company that offers guaranteed options like annuities within 401(k) and 403(b) plans, Melia says that his company is a big proponent of guaranteed distribution options. Why? Because they transfer the risk from the plan participant to the insurance company and provide those workers with security and a guaranteed amount of money each month in retirement.
Installment and periodic payment options are not guaranteed, like annuities. Instead, they take a person’s required minimum distribution, which is usually about 4% a year, and divvy that amount up into monthly or quarterly payments.
“The value proposition of guaranteed income is extremely high on participants’ radar,” Melia says. IRIC’s report found that 89% of people want income generating options in their workplace retirement plans, and 82% said they would be willing to give up 5% of their salary if it meant having enough to live comfortably through retirement.
“Plan sponsors want to help,” Melia says. “Seventy-five percent of plan sponsors believe it is part of their responsibility to help provide a secure income generating option in their plan.”
“As the population gets older and defined benefit plans continue to become less and less ubiquitous, I think employers and employees will think about their 401(k) or 403(b) plan as an income generating vehicle and not a ‘what’s my number or what’s my balance?’ vehicle,” he says.
It isn’t hard for plan sponsors to begin offering these options. It is just a matter of checking a box on the plan adoption agreement. Record keepers are already set up to do this so “this will not be a big effort from the employers’ perspective to move in this direction,” he says. “We think this could be an easy win for the plan sponsor to think about how their defined contribution plan can really provide retirement security and take away the financial anxiety folks may have.”
All of these options are available now, but the uptake isn’t as high as most in the retirement industry would like. They are optimistic that more plans will offer de-accumulation options and more employees will adopt them in their own retirement savings accounts as workforce demographics change and baby boomers exit the workforce.
One surprising find from the report was that the advent of these options has been an evolution and not a revolution, like some in the industry expected, according to Melia. It’s surprising because other new options, like target-date funds within plans caught on fairly quickly as employers and employees realized their usefulness.
The other finding was that plan participants are willing to put more money into equities when they have a guaranteed or annuity option in their workplace plan because an annuity provides downside protection when the market falls.
“The key to retirement security for near-retirees isn’t any more about how much they are saving,” he says. “The key is good asset allocation.”