STRENGTHENING THE PAYOUT
PHASE OF RETIREMENT PLANS
Leading retirement executives outline their ideas
By Thomas A. McCoy, CLU
What would it take to make the overall retirement system stronger? Specifically, how can we alleviate some of the uncertainty retirees face about sustaining income throughout their lifetime? That was the focus of a panel discussion among four leading retirement income executives at a Retirement Summit sponsored by the Employee Benefit Research Institute (EBRI) in December.
Representatives from Principal Financial Group, BlackRock, Mercer and Milliman were asked for their “big ideas” on this topic. Despite their diversity of perspectives, they basically agreed that a secure retirement is out of reach of a large segment of the population.
“The problem isn’t that we haven’t done a good job in planning and setting money aside,” said Dan Houston, chairman, CEO and president of Principal. “The biggest risk we all face is longevity. Thirty years ago the average retirement age was 63. Today it is 63 years and nine months. Yet, our lifespans have increased by six or seven years. That’s a good thing, but once we reach 80 years old, there will be complications, and we need protection.”
Each executive on the EBRI panel outlined their vision for addressing the complications of longevity. Their suggestions included greater use of annuities, more targeted use of technology and, for financial advisors, a more complete understanding of the individual circumstances of plan participants.
Ann Ackerley, managing director and head of the Retirement Group of BlackRock, favors using existing defined contribution (DC) plans and making a lifetime annuity the default option for account balances upon retirement. She would integrate a target date fund into the annuity.
“The guaranteed income option needs to be affordable, simple and easy to use.” Still, she stressed, “The guaranteed income is not for everyone.
“Mass solutions can work,” Ackerley said, “but the closer a worker gets to retirement they also need some kind of a tech-enabled spending tool kit to help them make better decisions. Deciding when to start taking Social Security could be the biggest decision they have to make, and they need some sort of tech help with that.”
Houston agreed. “We have the ability now, through predictive analytics, to help people make better decisions, including when to draw down their Social Security and how to draw down all their retirement accounts in the most tax-efficient manner. Employers now are demanding that we do that,” he said.
Ken Mungan, chairman of the board of Milliman, proposed creating a default for 401(k) plans that would deposit 3% of a worker’s account balance annually, starting at age 55, which would go towards funding a deferred guaranteed lifetime annuity. The annuity would begin paying out at age 80. Before age 80, the retiree would use the remainder of their 401(k) balance (approximately 75%) for retirement expenses.
“People fear an annuity because they see it as a large, irrevocable transaction,” Mungan said. “This approach divides the retirement income problem into two distinct pieces, and the worker can change their mind (opt out of the annuity) any time up to age 67.”
Mungan said the 3% DC balance allocations to the annuity could be portable from one employer to another. So, even if a worker changed jobs during the accumulation stage, the annuity could continue to fund. Also, he said, “The employee could take into account any funds they might have in IRAs in order to reach the amount needed to fund the deferred annuity.
“The default deferred annuity probably shouldn’t be used below a certain income level,” he added.
“We have the ability now, through predictive analytics, to help people make better decisions … . Employers are demanding that we do that.”
Chairman, CEO and President
Principal Financial Group
Ackerley supports integrating an annuity into a target date fund to create an income stream, but she thinks the annuity payout should be sooner. “People do not like to give up 25% of their assets and not get anything until they turn 80,” she said. She proposed that the annuity payments begin at age 65.
“That would allow someone to delay taking Social Security. They could use the annuity as a bridge to a later Social Security payout date, which could be a really good way of maximizing their lifetime income,” Ackerley said.
Rich Nuzum, president, investments and retirement, at Mercer, looked at the longevity risk from the standpoint of the financial advisor. He argued that someone’s vulnerability to longevity risk has to be evaluated using personal factors that go way beyond examining account balances.
“There are four quadrants of a person’s life that influence the risks they face in living to age 100: their health, their work, their savings, and their social connections. A good financial advisor will understand what’s going on in all four of those areas,” he said.
“Questions that need to be considered are: Does the retiree have a partner who will help take care of them? Are they in a multi-generational house where a younger person can help them with household tasks? Or will they need to pay to live in a senior living facility or to receive aging-in-place assistance in their home?
“As people get better projections, particularly from digital advice, and understand what they are in for, they are going to extend their working lives,” Nuzum said. “They are going to pay more attention to retraining so they can continue some kind of work. Their friends and family also will be a big influence as they consider these decisions.
“What’s needed in order to size up the longevity risk is a holistic view of individual circumstances,” Nuzum said. “We want to avoid having lots of destitute older people. If we can produce a simple model for lifetime income, we face a litigation risk if we don’t do it.”
An often large and unpredictable expense for most retirees is their health-care. Houston offered up one more big idea for dealing with this expense.
“Health Savings Accounts (HSAs) have been an innovative way to solve a lot of problems, but they deal with short-term, immediate medical-related expenditures. What if you had an HSA account that wasn’t tied to a healthcare plan?” Houston suggested.
“The money would always stay in it through the working years, so that when a person retired, they would have both their 401(k) money and the HSA. The HSA could be used in retirement to pay for expenses such as skilled care facilities, healthcare deductibles and co-pays.”
Although the panel’s purpose was to look into the future and suggest big ideas that could make the retirement system stronger, Houston reminded the attendees of the progress that the employer-based retirement system has made in helping U.S. workers save for retirement. “If you add up all the defined benefit assets, defined contribution assets and rollover IRA assets in the U.S., it’s larger than those of the next nine developed countries combined,” he pointed out.
“It’s a voluntary system in large part driven by employers’ paternalistic nature,” he added. “Yes, we can do more, but for the most part, it has worked well.”
Employers have made great strides in getting workers to save more in their retirement plans. Now brokers and plan sponsors will be looking closely at products and strategies that will help workers make good use of those funds when they retire.
Expect more conversations like the ones at the EBRI panel.
Thomas A. McCoy, CLU, is an Indiana-based freelance insurance writer.