Fidelity’s New Retirement Income Solution Avoids Guarantees

While there is significant interest being voiced among policymakers and plan sponsors about in-plan annuities, providers are favoring retirement income innovations that don’t involve guarantees.

Fidelity has revealed a new solution set aimed at helping participants effectively spend down their defined contribution (DC) retirement plan assets, both for 401(k) and 403(b) accounts.

The firm says its retirement income solution is designed to help all employees, regardless of their level of savings, and includes three core components. These are a digital user experience that educates and assists plan participants, a customizable cash flow withdrawal strategy, and a suite of dedicated retirement income funds, all of which are being integrated into the Fidelity workplace savings platform.

According to the firm, the digital experience and tools provide individuals with a platform to evaluate and compare various withdrawal strategies and select the option that best suits their needs. The Fidelity Managed Cash Flow withdrawal strategy is designed to complement the Fidelity Managed Retirement Funds and aims to provide a steady income payment strategy for individuals while maintaining a balance throughout their retirement. As a percentage-based withdrawal strategy, payout rates increase over time and are updated annually.

Finally, the Fidelity Managed Retirement Funds are a new set of mutual funds designed to be part of an employer’s 401(k) or 403(b) plan fund line-up for retirees. The funds, which provide an age-appropriate asset allocation mix that becomes more conservative over time, are designed to complement a withdrawal and payment process that help to deliver a sustainable income stream in retirement.

Talking through this development with PLANSPONSOR, Dave Gray, head of workplace retirement offerings and platforms, says the time has come for the DC plan industry to embrace its future role as the main retirement income vehicle for the American workforce. Gray notes that in 2019, more than half (55%) of retirees on Fidelity’s platform are keeping their savings in a plan past the first year of retirement.

“What is most impressive about that number is the fact that it has spiked since 2015,” Gray says. “Just four years ago, the number was closer to 45% of retirees. So clearly, in the past couple years we have seen the beginnings of what we expect will be a big trend of retirees and pre-retirees preferring to leverage their workplace retirement plan as a means for retirement income.”

The causes of this are varied, but one big factor is that employers have grown more comfortable with retired employees staying in the plan. They have increasingly come to understand that serving retirees helps to maintain the benefits of economies of scale for the whole plan population. And there is also the growing idea among employees that help with retirement income should be part of a holistic benefits package.

“We spend quite a bit of time talking these days with plan sponsors about the income challenge,” adds Eric Kaplan, head of target-date and 529 products for Fidelity. “They acknowledge that their workforce is aging and that retirement income has become an important topic of discussion. And for the participants there are also advantages. They keep the fiduciary protections and generally the pricing of their investments is going to be better in the plan context.”

Gray agrees with that assessment, adding that many plan sponsors are proud of the work they have done to build and deliver effective retirement benefits.

“They feel proud and a sense of accomplishment about the work they have done in recent years to get their plans into great shape—all the due diligence and the governance efforts,” Gray explains. “Many of them want to make sure plan participants can continue to benefit from that hard work, even after they have left full time employment at the company.”

The approach being taken here by Fidelity is notable in that it does not include guaranteed income products such as annuities. Gray and Kaplan note that Fidelity acknowledges that annuities can be very effective tools for people entering retirement, and, obviously, for those people who feel they want guaranteed income as part of their retirement spending strategy.

“When it comes to retirement income and annuitization, this is actually a far more complex set of decisions for a given individual than accumulation,” Gray says. “On the savings sides, we know the tried and true formulas. On the spending side, we are not at that point. And so, one of the challenges of annuities in DC plans is the risk of putting in place an attempted one-size-fits-all strategy that is not sufficiently tailored. To the extent that participants want guaranteed income, we think that is best left out of the plan context.”

To be clear, Fidelity believes information about annuities should be linked to the retirement planning conversation in the workplace. In fact, the firm has services that help participants understand and access appropriate annuity options. But Gray and Kaplan say this approach is distinct from trying to create “in-plan guaranteed income.”

Toni Brown, senior defined contribution specialist at Capital Group, home of American Funds, agrees that retirement income is the next frontier of innovation in this space. However, as Brown sees it, so much of the discussion has been centered around guaranteed income and annuities, and while that makes sense to some extent, guaranteed income products are not the only important part of this conversation. In fact, given the various challenges associated with bringing annuities into DC plans, Capital Group’s perspective is also that annuities are better sitting outside of plan.

“Many plan sponsors offer an annuity bidding platform that is linked to their plan, but it technically sits outside of the plan for a number of important reasons,” Brown explains. “Under this approach, in the plan, you then select the TDF be very effective to and through retirement. Sponsors should also then consider adding an option specifically built for those people who will be taking money out regularly.”

Speaking on the same set of topics, Pat Murphy, CEO of John Hancock Retirement Plan Services (JHRPS), says he sees “DC retirement income” as one of the next big collective challenges for the industry to overcome. For its part, Murphy says, JHRPS is driving full steam ahead on creating solutions and services to meet the decumulation challenge. For example, the firm is working on adding a drawdown tool to the adviser managed accounts it creates in partnership with Morningstar.

“We are also starting to change the way that we frame the retirement income discussion in the first place,” Murphy says. “It’s not a question of interest in retirement income solutions. Of course everyone wants to have income in retirement. What it actually takes to make a real retirement income plan is to look at your projected expenses and get more sophisticated about what are the absolutely mandatory expenses versus potentially discretionary expenses, and to understand an individuals’ unique longevity risk profile.”

Murphy goes through a host of questions that must play into building an effective retirement spending strategy: “How do you want to live in retirement? Do you want to travel or do you want to sit on your front porch and watch the world go by? Neither is right or wrong, of course, but it matters a lot for planning purposes. Are you going to retire in downtown New York City? Or are you planning to live in a state that has no income taxes and a relatively low cost of living? What is your health picture? Do you have diabetes? Cancer risk? What about your spouse’s health? All of this goes into a spending road map.”

Murphy also highlights the increasing interest in phased retirements among employees and employers alike as having an impact on retirement spending strategies.

“We serve 150,000 employers and millions of employees globally, and those employers sometimes have a hard time finding talent to replace people leaving their workforce,” Murphy says. “We increasingly see and we advocate for retirees being successful by working part time, both to remain connected and also to meet their expected income needs.”

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