Pension managers could be doing a better job of guiding retirees with their post-work pension planning.
For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting.
Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.
“Surveys are showing that this is a concern for individuals,” said Bruce Wolfe, head of individual retirement strategy at Insight Investment. “The first step is to understand how the decumulation phase differs from the accumulation phase and create a framework to deliver the steady, predictable lifetime income that retirees generally desire.”
- Mr. Wolfe believes many of the “hurdles for plan sponsors to do more are only a matter of perception.” This means steps do exist for those managing the plan to not only educate soon-to-be retirees but also offer solutions to help manage their assets at separation “giving them firmer footing for the next phase of their lives.”
- Meeting attendees basically agreed that while it was generally good to offer their employees a range of investment products – including environmental, social and governance options – within their retirement plans, there was little interest in what exiting employees did with their savings after they leave the company. While companies may offer some simple retirement planning tools, they do not want to risk appearing to be fiduciaries.
Decumulation in the spotlight. The lack of tools has put decumulation in the spotlight for many plan sponsors, a recognition that most retirees are lost when it comes to what is, in practical terms, fairly sophisticated financial analysis. For example, only 5.5% wait until age 70 to start taking social security benefits when most retirees should wait as long as possible given longevity protection and inflation hedge that social security uniquely provides. For 401(k) participants seeking help there are some positive developments including:
- 41% of plans have at least some form of “retirement income” solutions available, although plan sponsors acknowledge more innovation is needed.
- The Setting Every Community Up for Retirement Enhancement (SECURE) Act cleared away some legal impediments to offering more retirement income products, particularly annuity-related ones.
- QLAC products (Qualified Longevity Annuity Contracts) can be offered with limits within DC plans providing participants access to lifetime annuity contracts starting when individuals reach their 80s.
This means plan sponsors need to “think harder about the escalating challenges they will face through the ‘decumulation’ phase of their investment lifecycle,” the Insight Investment team told meeting attendees.
Unsteady footing. “Uncertainty is building as we find ourselves in an ‘interregnum’ between the post-war economic order and a brand-new economic era,” said Abdallah Nauphal, CEO at Insight Investment. “COVID-19 has provided an idea of how liquidity challenges, rebalancing and tail risk concerns can be elevated in stressed market conditions.”
- This means investors should prepare for future crises accordingly.
- “Plans may need to consider adding additional tools to the toolkit, such as completion, overlay, asymmetric payoff and cost-effective downside equity risk management strategies to help ensure full funding and manage pension risks,” said Shivin Kwatra, Insight Investment’s head of LDI portfolio management in the US.
- “We also believe investors need to focus on high quality investments to help ensure they meet their return and cash flow requirements with the highest level of certainty,” Mr. Kwatra said.