By Charles E.F. Millard
For decades, the insurance and investment industries have tried to sell products that deliver lifetime income in retirement. But those products won’t be adopted unless they are simple, seamless and easy to use. The more decision-making is required for participants, the lower the adoption rate is, no matter the plan.
There are two possible solutions: Offer participants a menu of defined contribution plan options or default them into a lifetime income option from the start. Either way, it must be easy. Let’s examine each scenario.
Ask participants to select from a menu
If there are multiple lifetime income options, participants need to figure out which options are best for them. Questions to consider:
- Are they OK with something irrevocable?
- Can they wait till age 75 or later before the income is turned on?
- Which menu item is likely to provide the most growth?
- What’s the difference between a DIA and SPIA? How about between a VA and a FIA?
- How much of their portfolio should go into lifetime income product and when should that process begin?
- How will this compare to other investment options in the plan?
It’s nice that the plan sponsor took the time to analyze and offer one or more solutions, but what chance does an individual have when it comes to deciphering all these variations? Lifetime income solutions harness the power of pooling, just like other insurance products. But they are not chosen by individuals in DC plans because they are too complicated.
And if a plan sponsor is unwilling to default participants into a lifetime income solution, it should make sure the “menu item” it offers is simple: It should be a target date fund (TDF) that pays guaranteed income. No other decision required.
Default participants into a lifetime income solution
Most plan sponsors are comfortable defaulting participants into a TDF because it doesn’t require any decision-making from the participant. Traditional TDFs automatically allocate different types of stocks, bonds and fixed indexed annuities to help participants grow their assets when they’re younger, and gradually get more conservative as they age. The TDF lines up with the participant’s expected retirement date, it’s professionally managed and diversified, and it’s fully liquid. The participant can always cash out.
Unfortunately, some lifetime income solutions are part of a TDF but still require the same kind of decision-making referred to above. What age? What portion of my savings? How much paperwork do I need to complete?
Other lifetime income solutions are part of a TDF, but ultimately use an irrevocable annuity to pay the lifetime income. And the participant is still required to make a decision.
Plan sponsors: Make it easy for participants
What do we need? A TDF that requires no decision-making, is professionally asset-managed, pays lifetime income and is not irrevocable.
Plan sponsors see the need for a default solution that is automatic. Of course, a default solution also must be fully liquid. No plan sponsor is going to default participants into something that is or could become irrevocable.
Sometimes, sponsors are reluctant to default participants into lifetime income solutions because they are afraid that they are “sticking them into something” that they cannot get out of. But a TDF that maximizes growth, automatically provides lifetime income and is fully liquid…that is truly seamless and simple.
With the Lifetime Income Builder as a default, the participant starts out in the right place—with a TDF that automatically pays guaranteed lifetime income. It is professionally managed without sacrificing accumulation. And the participant has full control of their assets, up to and through retirement.
The investment and insurance industry has marketed too many solutions that are too complicated and rely too much on participant decision-making. It is time to make it easy for the consultant to recommend, the plan sponsor to choose, and the participant to use.
Learn more about our patent-pending lifetime income solution, Lifetime Income Builder.
Charles E.F. Millard is Senior Advisor for Annexus Retirement Solutions and the former Director of the United States Pension Benefit Guaranty Corporation. This article is part of a series on the Five Fundamental Elements of Lifetime Income Solutions.