The primary focus of defined contribution retirement plans' sponsors and participants has typically been on accumulating wealth so that employees have enough savings when they retire. However, more recently, many are thinking of how to save in order to replace the
income participants need to maintain their standard of living throughout retirement.
To that end, the Institutional Retirement Income Council, a nonprofit think tank in the industry, has identified six major areas of risk that those planning for retirement – either on their own or on behalf of another – need to take into account. The six groups are:
- Sequential risk: how retiring in a bad economy can impact outlook
- Inflation risk: how inflation might erode lifestyle quality
- Longevity risk: how living beyond expectancy can affect savings algorithms
- Interest rate risk: will participants have to face low bond returns and high annuity prices
- Health care risk: will savings be harmed by the development of a
chronic illness - Behavioral risk: will human nature jeopardize years of spadework
“We hope plan sponsors opt to focus on participant retirement income adequacy, rather than simply investment returns, savings rates and participant rates,” says Rod Bare, an IRIC advisor. “While those metrics are part of what makes a DC plan successful, DC plans are now a primary source of retirement income for millions of American workers, and so the objective needs to expand. Employers who understand this can act accordingly, in the best interest of their plan participants.”
Most plan sponsors are of course aware of these six risks, but the IRIC wonders if they might fail to understand them completely. Once a risk is noted and identified, plans can be tailored to help address it. For example, a soon-to-be retiree concerned they might outlive their savings could be offered an immediate or deferred life annuity.
How a plan sponsor chooses to work with retirement savings can have a major impact on how employees approach their golden years.
“DC plan sponsors can be a valuable resource for their plan participants who are near retirement and can have a positive impact on their employee’s retirement outcomes,” Bare says. “With a better understanding of these risks, plan sponsors will be in a much strong position to help their workers nearing retirement.
Many of these risks are interrelated, and there will be some trade-offs to consider in addressing each risk. We hope, however, that sponsors take advantage of these suggestions to improve their participants’ outlook for retirement. After all, the goal of the DC plan is not just accumulation – it is increasingly being understood as the delivery of
post-retirement income.”
