Current Thinking

The Coming “Lifetime Income Solution” Revolution

A blog by Rich Rausser, CPC, QPA, QKA, Senior Vice President, Pentegra Retirement Services – November 3, 2015

We spend a great deal of our time at Pentegra helping participants accumulate the assets they need in order to achieve financial security for their retirement years. However, how do participants wisely transition from the accumulation phase to the decumulation phase and take control of the money they have accumulated to make sure that it continues to work for them?

In some cases, solely relying on one’s own ability to stretch one’s 401(k) retirement savings over the course of one’s retirement years may not be the most prudent strategy. In such event, one may want to consider a Lifetime Income Solution (“LIS”) as part of one’s decumulation strategy. Essentially, LISs are designed to convert accumulated retirement assets into a stream of income to support one’s financial needs throughout one’s lifetime.

The reasons for a LIS can be numerous, and include: growing uncertainty over the continued strength and viability of pension programs and Social Security; increased expenses in retirement, including healthcare and extended family care costs; and increasing life expectancies. While astutely planning for one’s retirement is a good idea at any age, it understandably becomes a more pressing issue as one nears their retirement.
For example, if you are thinking of retiring in two years and start taking stock of your assets — Social Security, an old defined benefit (pension) plan, an IRA, a personal savings account — the value of a LIS may quickly become self-evident. Because the amount of an individual’s 401(k) and other retirement savings accounts depends to some extent on how the market performs, adding a LIS as a 401(k) supplement can help allay to some extent dependence on market performance due to the fact that LIS products eliminate market risk to a large degree.

LIS participants essentially allocate all or a portion of their retirement savings to a reputable insurance company in exchange for a promise that the insurance carrier will pay them a guaranteed monthly retirement income for the rest of their lifetimes — no matter how long the participants live. The income even can continue for one’s spouse or partner even after the participant dies. (Note that the amount of income generated will vary depending on the type of annuity purchased, as well as the participant’s age, sex and marital status.)

It also should be pointed out that a LIS comes in two forms: in-plan and out-of-plan. An “in-plan” LIS allows participants to purchase lifetime income while their assets remain in their existing 401(k) plan. An “out-of-plan” LIS requires participants to take a distribution from their plan to purchase lifetime income outside the plan, and thus is usually only offered to participants upon retirement or termination of employment. If a sponsor elects to provide a guaranteed LIS option within an employer-sponsored retirement plan, 401(k) participants can essentially benefit from a traditional pension-like benefit built into their defined contribution plan.
Over time, I believe that more people are likely to find a LIS attractive, although that is not necessarily the case at the moment. NAPA Net the Magazine, the official publication of the National Association of Plan Advisors, recently conducted a readers’ poll to identify the biggest impediments to the adoption of LISs in defined contribution plans.

The top response was “Their advisor doesn’t like/trust the products,” followed by “Advisors believe that (Lifetime) Income Products will cannibalize their own ‘rollover’ model.” Other concerns included that the products were “hard to understand” and too expensive; difficult to explain to participants; and that they detected “no perceived need for the product.”

Another NAPA Net survey of nearly 5,300 plan sponsors found that nearly half of the respondents do not offer retirement income options in their defined contribution plans at all, and a third of the plan sponsors that do offer lifetime income products were uncertain about which options are offered.

In addition, the results of PlanSponsor magazine’s annual DC survey in 2013 revealed that well over half (57.3 percent) of plans with more than $1 billion in plan assets did not offer retirement income options (about 8 percent were not sure), and 56.6 percent of plans with $200 million to $1 billion in plan assets did not offer such options (with 14 percent of plan sponsors unsure).

Clearly, this is an area that is still just starting to come into focus for plan participants and sponsors alike. However, the LIS revolution is likely on the horizon, and getting educated about it now can only be a good thing.