The second quarter 2018 issue of The Cerulli Edge – U.S. Retirement Edition includes the results of a defined contribution (DC) plan participant survey, focused on those age 45 and older and digging into the topic of income planning.
These older participants were asked directly, when they retire, what they plan to do with their DC plan savings. According to Cerulli, the results show that participants are “generally clueless” as to what they will do with their accumulated savings. In fact, as Jessica Sclafani, director at Cerulli, observes, fully one-quarter of respondents explicitly answered, “I don’t know what I will do with my 401(k) account savings.” And another one-quarter say they “will ask my existing financial adviser for advice.”
As Sclafani sees it, the latter data point can be read as “a marginally more prepared version of I don’t know.” Thus, the survey seems to suggest that at least half of 401(k) plan participants have no idea what to do with the savings they have diligently set aside for retirement. Furthermore, Sclafani observes, another 8.5% of respondents say “I will hire a financial adviser to help me.”
The Cerulli report suggests that advisers, consultants and plan providers must “work closely with plan sponsors to identify the sponsor’s preferences for retaining the assets of retired participants in the plan and ensure these preferences are reflected in the plan’s available distribution options.” These might include a single lump-sum, installment payment program or “SWPs,” partial withdrawals and in-plan annuities.
“This data underscores the important role of advisers in supporting a thoughtful and sustainable drawdown strategy,” Sclafani adds. “There is clearly demand for withdrawal advice from individuals.”
Another theme in the report is that it is important to avoid “silver-bullet thinking” when it comes to DC plan decumulation and retirement income planning in general. As the Cerulli report explains, retirees rely on a mosaic of sources for retirement income, some guaranteed, some provided by the government, and some that are solely dependent on the individual.
“An investor’s draw-down strategy can have significant implications on taxes, duration of income and, ultimately, their lifestyle in retirement,” the report points out. “Given the idiosyncratic nature of retirement income planning, investors generally require the assistance of a financial professional.”
At this stage, Cerulli does not have a very high assessment of financial advisers’ skills on nuanced topics such as Social Security claiming strategies or retirement health care expenses. This presents both a challenge and an opportunity for forward-thinking advisers and sponsors to work together to forge a new path.
More from the 2018 Cerulli 401(k) Plan Participant Survey
Cerulli’s survey data shows the expected retirement age of today’s workers averages to about 64 or 65.
“Notably, average expected retirement age increases by age cohort—for example, the two oldest age cohorts, ages 60 to 69 and 70 and older, have later anticipated retirement ages, 67.8 and 73.4, respectively,” the report states. “We believe these expectations are likely closer to reality.”
The report goes on to highlight that the average retirement age for men and women per the 401(k) plan participant survey yielded very similar results, 64.6 and 64.2, respectively. Cerulli finds this “somewhat troubling” given that women, on average, are expected to live almost three years longer than their male counterparts.
“Given the average expected retirement age of close to 65 years old, per Cerulli survey data, Americans will need enough retirement savings to fund their living expenses for almost two decades—a daunting prospect,” the report warns. “This disconnect between expected retirement age and life expectancy may not be fully realized by consumers leaving them vulnerable to running out of savings.”
The report shows the topic of “evaluating if I am saving enough” ranks as the most commonly selected area 401(k) plan participants consider as “most important” when planning for retirement. Women are notably more sensitive to the issue of outliving their savings, Cerulli says, with 48% identifying this evaluation as most important compared to only 34% of men.
“Annuity products, unfortunately, continue to face both reputational and real obstacles, as a potential component in solving for a population that is expected to experience rising life expectancy,” Cerulli concludes. “As one product development executive focused on the lifetime income category states, ‘People love guaranteed income, but not annuities.’ Furthermore, some consumers mistakenly believe that they must annuitize 100% of their savings all at once, losing any flexibility and access to their savings.”
QLACs and QDIAs
The Cerulli research also looks back to 2014, when the U.S. Department of the Treasury and the Internal Revenue Service issued final rules regarding longevity annuities making qualifying longevity annuity contracts (QLACs) accessible to 401(k) plans and individual retirement accounts (IRAs). The main change was that QLACs were provided relief from required minimum distributions (RMDs) up to age 85.
“As such, QLACs appear to be a neat solution for an aging population that has concerns about outliving their savings,” Cerulli reports. “Despite this, QLACs have yet to gather significant assets and some industry constituents say the future of this product remains to be seen, and oftentimes point to challenges related to incorporating QLACs in an employer-sponsored plan context. Related to the earlier discussion of retirement plan distribution options, incorporating access to a QLAC could be a first step for a plan sponsor considering incorporating annuities.”
These findings are taken from the second quarter 2018 issue of The Cerulli Edge – U.S. Retirement Edition. More information about obtaining Cerulli reports is available here.