What Do You Mean We’re Going to Get Old?

Everyone seems to want lifetime-income products as a 401(k) option. But our retirement system is so skewed toward accumulating, not drawing down, assets that the income problem managed to catch us by surprise. Change is coming--but not nearly fast enough.

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It’s almost as though we thought we’d never get old. Over the past 30 years, the retirement savings industry shifted away from lifetime-income products. Now that the largest generation in history is retiring, we’re discovering what we really need more of is … lifetime-income products.

Americans are woefully under saved, and even those with bulging 401(k) and IRA accounts have little idea how to draw down their savings in such a way that their nest egg will last for three decades. We have guidelines—like the 4% rule. But a guideline isn’t a certainty even if you have the discipline to stay with it. Meanwhile, historic low rates lessen the odds of successfully making savings last.

The good news is that policymakers and financial planners are on it. There is wide recognition that secure lifetime income beyond Social Security payments is critical to the retirement health of millions of retirees. Money managers like BlackRock and Prudential have begun marketing lifetime-income options designed for 401(k) plans, and the federal government is easing rules that had made such options difficult to offer.

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But don’t look for the cavalry to arrive anytime soon, concludes new research from Vanguard. Companies that offer 401(k) plans are terrified of the liabilities—even though all they’d be doing is offering an insurance product (annuity) through a third-party. At the same time, the government is focused on broad budget and tax reform. Any retirement savings issues will be addressed as a small part of that, say researchers Steve Utkus and Jamey Delaplane. From their report:

“According to Mr. Delaplane, of Vanguard Government Relations, the biggest obstacle is the plan sponsor’s fiduciary requirement to monitor the solvency and creditworthiness of the insurer. ‘Plan committees generally have been reluctant to take on additional liability and the new rules do nothing to minimize fiduciary risks for plans that offer these options,’ he said.

The researchers even question how many employees would choose a lifetime-income product if given the choice:

“Mr. Utkus said behavioral evidence suggests that neither participants nor retail investors have found annuitized income attractive. ‘There are a number of reasons why investors might steer clear when offered traditional income annuities, including sufficient guaranteed income through Social Security and possibly a [traditional pension] plan, strong bequest motives, and a desire for liquid assets to meet unexpected needs.’ Mr. Utkus said.”

For these and other reasons, companies have been slow to embrace lifetime-income products in their plans, though there is clearly movement in that direction. One in five employers expect to introduce such an option in the next 12 months, according to the 2012 BlackRock Retirement Survey. That would double the number already offering such an option.

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Another sign of movement: The Department of Labor is working on guidelines so that employers will include on monthly statements the expected monthly benefit at retirement, given an employee’s account balance, age, and estimated rate of investment return. These guidelines should be ready this fall. The idea is to get savers to focus on their nest egg as a future income source, not ready cash. Further easing of restrictions on 401(k) income products is expected early next year.

So this is happening. But, according to Vanguard’s Utkus: “the main change that needs to occur is that employers working with insurers need to get comfortable with the annuity selection and monitoring process, and I don’t think the government will be willing to help with that by relaxing the fiduciary rules.” In other words, it’s going to take some time.

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John Bevacqua
John Bevacqua

There is nothing magical about putting lifetime income options into a 401k plan, as it is very easy to roll a 401k plan into an IRA and purchase any annuity currently offered in the IRA.  Both Fidelity and Vanguard (and I suspect others) offer a wide range of annuity products, so rolling into an IRA into with these institutions can provide a great amount of flexibility.

The article is right in that it is more about changing the participant's mindset about that savings, that it really represents a present value of future income, not a lump sum - most people do not have the ability to work through this mathematical conversion, so become surprised when they see how little income their savings generates.

The biggest problem with lifetime income products is that financial advisers do not like them.  Fee-based and fee-only advisers lose the assets under management, and even life insurance agents do not like them because it becomes "dead money" that cannot be moved into another annuity 5-10 years down the road.  Thus, they get no traction in the market.

So, most people end up having to figure it all out on their own, which is no easy task because it is a very complicated financial issue.

I have written several blogs on retirement income planning, which may be helpful - you can access it here http://bit.ly/ytiuii

chrisluke246
chrisluke246

I think lifetime income products are getting popular worldwide as more and more young generation people investing into retirement plans. Not only in America even in Asian countries like India and China investment into such plans has increased over last few years. Investment companies has started providing small apps like retirement calculator to help investors calculate their exact retirement amount.