Thanks to the SECURE Act, lifetime income options may become more widely available, but a new blog post suggests that plan sponsors may need to consider more than a one-size-fits-all solution.
In “An assessment of today’s lifetime income product categories,” Russell Investments’ Holly Verdeyen looks at the current options in the marketplace, along with an assessment of each solution based on various metrics and considerations for plan sponsors.
In an earlier blog post, Verdeyen explained that the specific needs of each retiree will vary significantly, depending on the degree of value each individual places on sustainability, predictability and flexibility. And for these reasons, she notes that it’s unlikely the retirement income marketplace will mature into a universal, one-size-fits-most solution like traditional target-date funds (TDFs).
Instead, she suggests, a spectrum of decumulation options may eventually win out as the preferred approach to implementing lifetime income in DC plans. “A spectrum of investment options for the spend-down phase, which has long been the construct for the accumulation phase, can help retirees in all situations put together the pieces to create an income stream tailored to their specific circumstance regarding benefits package, outside assets, Social Security, required minimum distributions and other household assets and income,” writes Verdeyen.
That said, she notes that plan sponsors must start somewhere, to which she suggests a “logical starting point” is a qualified default investment alternative (QDIA) with a guaranteed payout option, along with a managed account that includes a payout provision. “This provides lifetime income bookends for the employees in the plan that want to take their hands off the wheel and receive professional guidance on asset allocation and annuity purchase decisions,” notes Verdeyen.
Additional lifetime income options could be added as demand increases, and those who are not one-size-fits-all could opt out of the default and choose an alternative, she further explains. Verdeyen cautions that even with a well-designed, post-retirement income menu, participant demand and adoption could remain low if a lifetime income option is not included in the default. “We offer it, but no one uses it is an all-too common refrain from DC plan sponsors,” she explains.
To help plan sponsors choose, she suggests that a useful starting point is creating a framework to align the different types of lifetime income solutions to high-level participant needs and preferences, based on the three primary financial needs of retirees: sustainability, predictability and flexibility.
The blog post includes a chart describing the various types of lifetime income product categories currently available and provides a qualitative assessment of the directional indicators of success for each product category. It then provides a map of the type of participant each product category may be most appropriate for based on the participant’s financial needs and preferences, along with the potential strengths and weaknesses of each product category.
“Our assessment shows that a variety of valid approaches exist to meeting employee needs in retirement,” says Verdeyen. “Ultimately, it is unlikely that any one lifetime income solution will fit the majority of employees.”
