Benefits Business

Boomers ask: Will I have enough?

Producers are the go-to source for retirement income planning

By Len Strazewski

The first wave of Baby Boomer retirees is reaping the harvest of years of retirement savings, but will those savings last their lifetime? Will retirees make the right choices in designing a lifetime plan to secure their future?

Nancy Bennett, senior life fellow of the American Academy of Actuaries, says the American retirement system and the employees who use it could be facing a crisis of adequacy in the next few years as more Boomers reach retirement age. They are likely to live longer, she says, and to need more resources than many retirees believe.

As a result, this steadily building wave of retirees may make poor choices about the disposition of their retirement savings—unless employers and the experts who advise them on retirement plans help them prepare for their future.

Employers are critical to the solution, Bennett says. While individuals get information about financial planning from a variety of sources, including the federal government, advocacy groups like AARP and the media, their first stop is usually the employer that provides retirement benefits, Bennett says.

"You cannot underestimate the importance of the employer in providing information and education to employees. Not everyone is covered by an employer plan, but many are—and studies indicate that employers are the first source employees turn to for information about their financial future."

And agents and brokers are often the first stop for employers that need guidance on benefits communication and financial education, she notes.

"Some employers are nervous about providing financial education to their employees. They are concerned about taking on too much responsibility for their employees' decisions. There is also some anxiety about providing personal financial advisors who cannot provide totally unbiased advice," she says.

Recognition of the issues surrounding lifetime income adequacy led the American Academy of Actuaries Life and Pension Practice councils to form a Lifetime Income Risk Joint Task Force to lead a discussion of retirement issues from an actuarial perspective. The task force produced an industry white paper which discussed possible action for government and employers to take.

Blueprint for action

The organization stops short of formal recommendations but does identify topics for employers to consider and regulatory areas for government analysis, Bennett says.

"We wrote the paper to introduce a series of ideas for each of the constituencies that influence retirement actions. There are a whole range of actions that can be taken by the retirement industry," says Bennett, a member of the task force. "The paper lays out a number of ideas that each of these groups can discuss to address the problems."

The task force suggests that employers consider:

• Focusing employees on the concept of lifetime income by expressing benefits in terms of monthly lifetime income in their periodic retirement plan statements.

• Developing innovations in providing lifetime income information for employees through the workplace during their careers and offering pre-retirement seminars to help workers understand their lifetime income needs and prepare for retirement.

• Designing programs to emphasize the value of lifetime income planning and management at the time when an employee is deciding whether to cash out a defined benefit pension plan through a lump-sum distribution or keep assets in the plan.

• Providing lifetime income education and making available lifetime income products when a participant receives a distribution from a defined contribution plan, such as a 401(k).

Full or partial annuities may be one viable option for retirees who want guaranteed lifetime income, Bennett says. "Purchasing an annuity makes sense for some retirees, and the option should be available at the time of payout. However, individuals need information about these products from an unbiased source that can help them make the decision."

The task force also recommends that the federal government consider regulatory and policy changes that would promote retirement security, clarify safe harbors and create more options for lifetime income. The suggested rule changes would allow employers to modify retirement plan designs to provide more lifetime income choices and annuities when employees cash out their plans, Bennett says.

Among the recommendations for the government:

• Expand existing initiatives of the U.S. Department of Labor and other public entities that currently disseminate objective retirement information.

• Reduce insecurity about the adequacy of lifetime income by communicating the value of life and health guaranty associations and the Pension Benefit Guaranty Corporation, and ensuring that such programs remain sufficiently strong.

• Address Social Security's long-term funding issues to promote confidence in the stability of the program and assure retirees that they can plan accordingly.

• Increase the Social Security maximum age for delayed retirement credit beyond the current age 70 to allow additional flexibility in addressing longevity risk.

• Increase the age for required minimum distributions (RMD) beyond 70½ years to reflect increasing life expectancies.

• Implement proposed regulations that would allow longevity annuities to satisfy RMD rules.

• Provide targeted tax incentives to encourage use of lifetime income solutions.

The longevity income risk is an important consideration, Bennett says, and is a key issue for benefits producers and advisors as they consult with their clients about their retirement plans. "If we start talking about these issues today, there won't be a crisis in 10 years," she says.

The good news

Here's some good news. Employers are already recognizing the issues and are responding with communications strategies to educate employees and plan design changes to reduce overall costs.

According to a 2012 survey of 428 employers conducted by Aon Hewitt, a human resources consulting company, 80% of respondents are focusing on employee financial wellness with benefits communication programs, online tools and mobile apps.

About 61% said they will be measuring the expected retirement income adequacy of employees, and 86% said they will communicate the concept of retirement adequacy, projected needs and strategies for meeting adequacy standards.

Employers also are adopting new technology to communicate this information. About 83% of respondents say they will host Webinars to educate employees, and more than half (52%) will produce a podcast for their employees. About 42% will use text messages as part of their communications strategy.

Employers also are making plans to comply with new disclosure requirements that will reveal total plan costs to participants. Nearly all (95%) of respondents who have not yet calculated their total plan costs say they will do so this year, and about half (52%) are hiring third-party consultants to benchmark their plan costs.

The calculations are likely to lead to cost reductions, the survey indicates. About 31% of respondents have already changed their plans to reduce costs, and more than half of the remaining respondents say they will do so this year.