Talking about it: Industry voices on retirement income

By Deb Dupont

Retirement remains a common investment goal for nearly all working Americans; 401(k) plans and similar workplace retirement savings accounts often represent individuals’ and families’ single largest non-home investment.

Turning that investment into income, however, has become an increasingly prominent and important conversation in the financial services industry — and one that has potential repercussions for you and for your clients.

How to use the defined contribution plan itself to generate income is the topic these days, and there are a variety of “voices” in the discussion, most likely with an equal variety of opinions and thoughts.

At LIMRA, we study the DC industry, monitoring developments and solutions to help stakeholders — from product manufacturers to distributors, consultants and advisors — create and bring to market relevant solutions for both employers and employees.

We recently tackled the subject of retirement income — soliciting those voices from professionals across the financial services industry. Approximately 40 DC industry professionals from recordkeepers, distribution firms, research firms and industry utilities completed our survey, giving us a diversity of opinions and voices seldom heard in discussions of industry issues.

Most industry experts agree that solving for retirement income is an industrywide problem

Most industry professionals believe that income solutions should be incorporated into a plan’s investment lineup as opposed to simply being available for election/choice or rollover at retirement. This allows plan participants to choose (or be automatically enrolled in) an investment option designed to provide income at retirement. Often this option is an annuity feature attached to a fund chassis or platform (such as a target date fund), but other constructs can include (or be part of) managed accounts, managed payout funds or even the purchase of annuity “units” via ongoing contributions.

“Income options” included in a plan can be guaranteed (i.e., with an annuity component) or “best effort” but no guarantees. Only half of those surveyed agreed that a guarantee must be part of a successful income solution, although the majority allow that there is a place for both guaranteed and nonguaranteed income solutions within DC plans.

Although there is strong consensus among industry experts about the need for in-plan income investment options, there’s also a strong feeling that helping individuals with retirement income is a financial advisor’s role. All respondents believed that personal financial advisors have a high-to-medium responsibility for helping individuals create an income stream from a DC balance. At the same time, however, our research shows that only about a third of consumers (and mostly older and higher net worth consumers) regularly work with a personal financial advisor. This raises the question of how do the rest create their personal income strategies? The answer may very well be that these in-plan investment options will help them do just that.

What can you do with this option, and how will it help your own clients? As in-plan options become more common, at least considering their role in your clients’ strategies should be part of your planning efforts. When it comes to clients’ 401(k) or other DC investments, understand what income options are available to them. The convenience — and potentially the price — of in-plan options may make them a good fit for many.

In-plan investment options should be something advisors bring to the table for consideration in plans’ investment lineups. When you work with plan participants, especially those who may not have the resources or assets for full-fledged financial and formal retirement planning, leveraging the options available within the plan itself may prove an appropriate solution for creating a reliable, predictable income or income base.