Retired workers can easily spend assets at an unsustainable rate when there is no retirement income plan in place, which further exposes them to inflation risks, market volatility and the risk of outliving their assets, according to the Society of Actuaries (SOA) and the Stanford Center on Longevity, which jointly released “The Next Evolution in Defined Contribution Retirement.” While employer-sponsored retirement income options are not yet widespread among defined contribution plans, the report said, employers are in an advantageous position to help their retiring employees by offering retirement income options.
The intent of the report is to inform employers and plan sponsors about how to implement retirement income solutions and why doing so is important. The report identifies annuities and systematic withdrawals as retirement income generators to consider, since they produce higher amounts of retirement income than simply investment income.
“It is important for people to evaluate all of their options for a lifetime paycheck and to set clear goals of what their retirement plans need to achieve,” said actuary Steve Vernon, consulting research scholar for the Stanford Center on Longevity. “Different retirement income methods produce significantly different amounts of income depending on the method chosen. Employers can help retiring employees understand the pros and cons of each method, as well as the amount of retirement income, so retiring employees can make informed decisions.”
As part of the SOA’s report, Dr. Wade Pfau of The American College of Financial Services, developed stochastic forecast models on the tradeoffs of the different retirement income generators. The analysis shows that various retirement income generators produce significantly different amounts of income throughout retirement and react differently to favorable and unfavorable economic scenarios.
“Using risk models, actuaries can provide employers and retirees alike with insights on the significant outcomes and risks for retirement plans in a down market,” said SOA President Tonya Manning. “There is a clear opportunity for employers to help their work force prepare for the future, and this report is designed to inform employers of the retirement plan options.”
A retirement income program might be a low-cost benefit improvement that delivers significant value to older workers, the report contends. By offering retirement income solutions with institutional pricing instead of retail pricing, employers can significantly increase the amount of retirement income their employees may receive. Employers will benefit from offering retirement income options through enhanced reputation as a desired employer and corporate citizen, improved worker morale and lower administrative costs.
According to the report, two of the largest barriers to employers and plans sponsors adding retirement income solutions are administrative complexity and fiduciary concerns. The features of the retirement income generators will vary, depending on risk tolerance, economic optimism/pessimism, life expectancy and self-discipline with spending.
The report provides plan sponsors with an outline so that they can design a retirement income program and a checklist of questions to ask retirement income providers. It also includes information about administrative and design considerations, issues with offering default retirement income solutions and discussion points about fiduciary liabilities from prominent Employee Retirement Income Security Act (ERISA) attorneys.
The report can be found here.