Filling the Void in Guaranteed Retirement Income
Posted by Fi360 on March 31, 2017
Earlier this week, we hosted a webinar to discuss the factors that have contributed to a need for guaranteed income strategies in retirement planning, the strategies and products that have emerged to fill this need, and what due diligence factors fiduciaries should consider when evaluating guaranteed income solutions. A recording of that webinar is now available:
We had a number of questions submitted during the webinar that we were unable to answer live. Here is a Q&A to address those questions:
Q: I am still very concerned that we continue to allow participant loans, in-service distributions, etc. that end up depleting retirement savings. As an industry, we need to go back to the fact that these are retirement accounts and put restrictions on access. Can you comment?
A: In general, we favor making loans and other distributions more challenging for participants to access; same goes for brokerage windows. Features that could potentially harm savings rates or cause excess market risk should require several hurdles before participants are granted access. The EBRI statistics make clear that most participants do not save as early and as much as they should and do not make wise choices about in-service withdrawals, taking loans, and taking money out altogether when they change jobs.
Q: Advisors and plan sponsors need to know their participant base. Are they highly paid, well educated, and know how to manage their 401k? Then a lifetime income may not be as attractive. If employees are educated as to portfolio design, they can have a great deal of confidence about an income stream from their portfolio.
A: This is certainly true for some. Unfortunately, many participants are not financially savvy, are not disciplined in handling the assets of their plan, and do not have or rely upon a professional advisor to help them do the right things. Participants need to be profiled to best assess the appropriate plan design for each specific group.
However, longevity risk is very real, increases rapidly with age (especially after 65), and is rising with medical advances. Guaranteed income options are likely to make sense for many. Even the highly paid and well-educated may find comfort in hedging some longevity risk, especially in light of medical advances that are leading to longer life.
Q: I feel like the SS confidence statistics are skewed by widespread rumors (since 2010-ish?) that SS is going 'bankrupt' and we may not have SS in 20, 30, 40 years. Everyone has been conditioned to be pessimistic about SS without having any real substance to back it up. Just my two cents!
A: Good comments, thank you. Agreed that we've been conditioned to be pessimistic about SS. If it helps plan participants focus on saving more, perhaps that's not a bad thing in the end.
Q: If inflation is at 3 percent per year, the purchasing power of the income stream out of the annuity is down 50 percent after 24 years. How do you counter this?
A: Great question. Riders for inflation protection may be added to QLACs. The cost of those riders should be weighed against the potential benefit.
Q: Please comment on conflict of interest with advisors rolling 401(k) plan assets into IRAs, where they will be managed at a higher fee. There’s an advantage for the broker to get those rollover fees versus putting a lifetime-income option within a plan
A: You are correct on this point. ERISA plan fiduciaries are obligated to act in the sole interest of participants and beneficiaries (or their best interest if the Best Interest Contract Exemption comes into play under the new DOL Fiduciary Rule). The relevant plan fiduciaries (typically the plan sponsor and the advisor) must evaluate alternatives based on the facts and circumstances (such as participant demographics) in establishing an appropriate plan design. The advisor must also evaluate the relative advantages and disadvantages of a rollover in formulating their advice. The DOL Fiduciary Rule would provide greater enforceability of these obligations.
Q: With recordkeepers, mostly insurance carrier providers offer these options, but they are proprietary options versus allowing other provider options be listed on their recordkeeping platforms. Do you see this changing?
A: At one point, target date fund purchases were largely restricted by recordkeeping platforms, but they've opened-up (significantly since the DOL's 2013 guidance on addressing fiduciary responsibilities with TDFs). We expect a similar market opening with insurance/retirement income offerings driven by client demand and regulatory encouragement.
Q: Any feel as to when the pricing will come down. They all seem to charge 1bps.
A: Similar to cycles experienced with other offerings, we expect the increase in demand, especially from plan sponsors, as evidenced in the MetLife study referenced in our webinar), will create scale, innovation, and competition that will drive prices down. One asset manager with whom we spoke in gathering our research has contemplated purchases from multiple insurers, creating competition that is expect to lower prices within their offering.
Q: Aren't the internal costs in annuities a concern?
A: Yes, costs are a concern. Some retirement income providers speak to those costs as rationale for using other means (besides annuities) to supply retirement income.
That final question provides a nice segue to our upcoming webinar that will feature multiple asset managers discussing perspectives on annuities versus other retirement income solutions.
If you have any additional questions, please direct them to support@fi360.com.
