Helping employees find the off-ramp toward sensible retirement income distribution

Although most retirement plan sponsors train their laser focus on helping participants save adequately for retirement — and rightly so — one nonprofit group is encouraging sponsors also to pay attention to assisting pre-retirees in preparing for the income distribution phase.

According to the Institutional Retirement Income Council, a key area in effective 401(k) management is providing an investment menu that offers a roadmap for employees to plot out how their funds will be distributed in retirement.

“When they come up to retirement they’re struggling on how much they need to retire, and they delay retiring and throw up their hands,” says Steve Vernon, and IRIC member and president of Rest-of-Life Communications, a retirement planning service. “This will help employees get more conformable with retiring. A lot of employers want to do the best they can for employees and they don’t want to see their employees waste the money.”

Unfortunately, 13% of workers are confident about their ability to retire and only 42% of workers have tried to calculate how much money they need to retire comfortably, according to a 2011 survey by the Employee Benefit Research Institute. Still, Vernon points to the distribution menu as back-up plan for employees to properly plan retirement. He acknowledges that this might be an overnight epiphany for employers, but much like auto-enrollment, it might take time for employers and employees alike to get used to the idea.

“I’d be willing to bet that 10 years down the road, most 401(k)s will operate like this,” Vernon says. He says one roadblock might be concerns around fiduciary liability. However, if employers stick to the guidelines that already exist, there shouldn’t be major problems. “The challenge is how you put that into reliable life income. This solution addresses the issue, it’ll help make 401(k) plans more viable, up until now they’ve worked as wealth income, but that’s completely different retirement income.”

The issue brief, “The Retirement Income Menu: An Idea Whose Time Has Come,” describes the key features that plan sponsors should consider when developing and implementing a retirement income menu for plan participants. The menu would include a lump sum payout and/or a rollover for employees who don’t want to use the retirement income menu — similar to the brokerage window for investments.

“The clients that I talk with are interested in this because they’re seeing older employees struggle,” Vernon says. “In a 401(k), it’s hard to know how much income you’ll get so this makes 401(k) plans operate like pension plan. It’ll help solve this problem; it’ll help people retire.”