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clearly come to improve the quality of the
conversation about " decumulation, " says
Annexus co-founder Don Dady.
The Challenge
Huge numbers of Baby Boomers are
reaching retirement with no structured
strategy for how to spend their accumulated
assets. The statistic regularly
thrown around is: 10,000 Baby Boomers
turn 65 every day. Given these numbers,
Josh Cohen, head of institutional defined
contribution plan business for PGIM,
in Chicago, has made the decumulation
challenge a major focus for his team,
particularly as it applies to late-career
workers and Boomers. Cohen suggests
that a broad new perspective is needed-
one that focuses more on the notion of
" individual retirement income liability. "
" Ultimately, we must keep in mind
that DC plan participants will need
ongoing help in managing a variety
of risks, notably market, inflation and
longevity risks, " he says. " Longevity risk,
the risk of outliving one's money, is linked
to all risks retirement savers experience
and, thus, is the most critical to manage. "
Individual participants in DC plans
will always face the structural disadvantage
of not being able to pool their
mortality risks, Cohen says. In addition,
lengthening life expectancies due to
healthier lifestyles and advancements in
medicine require that investment earnings
keep pace.
" These mortality improvements,
while positive from a lifestyle perspective,
leave participants in a difficult position
to manage through these risks on
their own, " Cohen warned. " Insurancerelated
solutions can be of significant
help to bolster private savings and Social
Security. These products have the ability
to better pool mortality risk, reduce
market volatility and protect against inflation,
but of course they come with unique
complexities that need to be carefully
considered. "
Cohen believes plan sponsors should
be aggressive and truly try to help older
participants solve these challenges, even
with the understanding that some may
intend to leave the plan upon retirement.
" Doing so will require addressing a
variety of questions, and today we have
more questions than answers, " Cohen
says. " Will the retirement income solution
be offered in-plan or out-of-plan, as
something to be accessed via a rollover?
Should it be guaranteed or not? If in-plan,
is the product offered on a stand-alone
basis or as part of an existing investment
option such as a target-date fund [TDF]? If
income is guaranteed, is the rate that the
guarantee is based on fixed or variable? Is
it portable? "
For annuities and other insurancetype
products, fiduciary and cost concerns
continue to weigh on sponsors, Cohen
and Dady agree. But increased regulatory
protections when it comes to insurer selection
will likely lead to greater adoption.
The Solution Set
On the side of nonguaranteed in-plan
solutions stand managed accounts,
managed payout funds, and even some
target-date funds designed to be compatible
with systematic withdrawals. In terms
of in-plan guaranteed income, there are
deferred income annuities, guaranteed
lifetime withdrawal benefits, as well as
immediate income annuities. Progressive
plan sponsors have already found innovative
ways to incorporate each of these into
their lineup.
Speaking to this set of issues, Joe
KEY POINTS
* Baby Boomers are reaching retirement with no structured strategy
for how to spend their accumulated assets.
* There are several forms of products available: Guaranteed include
deferred income annuities, guaranteed lifetime withdrawal benefits
and immediate income annuities; nonguaranteed include managed
payout funds and systematic withdrawal structures. More products
are in development.
* Plan sponsors and their advisers should determine the appropriateness
of various income solutions for participants, keeping in mind that
there is not a one-size-fits-all solution.
Ready, head of Wells Fargo Institutional
Retirement and Trust, in Charlotte, North
Carolina, says there is likely not a single
one-size-fits-all solution that could help
all Baby Boomers control their spending
of defined contribution plan assets.
" This is such a significant part of our
ongoing strategy planning and work, as a
provider, so plan sponsors can take some
comfort from that, " Ready says. " New
solutions are being worked out right now
and will soon be brought to bear. "
He says he " increasingly likes the
notion of people being more willing to
stay in the plan and manage their income
that way, through a variety of solutions, "
whether in a guaranteed or nonguaranteed
context.
" What we need to see is more sophisticated
support for these folks that not
only includes a drawdown rate recommendation
but also helps to optimize
Social Security, tax diversification, asset
location, longevity hedging, medical care
cost preparation and all the other important
factors, " Ready says.
" When you get into the core competencies
and technical skill sets needed to
provide these services in a turnkey way, it
is quite complicated, " he continues, " and
so the work is challenging for providers.
But it is so important, and we have to keep
pushing this work forward. I believe, in
the end, we will find ways to use digitization
and in-person support, in concert,
to really help people take control of decumulation. "
-John Manganaro
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