A Lack of Retirement Income Guidance Harms Participants

Defined contribution plan participants are unlikely to feel confidence about retiring when they receive no retirement income projections and no help defining discretionary versus required expenses.

David Lau, founder and CEO of DPL Financial Partners, a firm that bills itself as a commission-free insurance network for retirement plan and wealth management fiduciaries, uses a personal story to explain the source of his deep interest in the topic of retirement income.

“Watching my father’s experience during his late career really drove me to become interested in income insurance and annuities,” Lau says. “My dad was a successful professional who by the end of his career clearly had enough assets saved for retirement, but he kept working for five or six years after the traditional retirement age.”

Lau and his other family members assumed their father simply liked to work and would never hang it up willingly. In reality, Lau’s father chose to keep working because he thought he had to.

According to Lau, even though he had a long-term personal financial adviser, his father received no education or support about the decumulation phase of retirement and wealth planning. As a result, Lau says, his father was not presented with the clear and compelling evidence that he had amassed enough wealth to retire comfortably and confidently. It was only after starting to work with a new adviser that was skilled in the area of retirement income that Lau’s father chose to retire. 

“My father is now happily retired, and his only regret is that he hadn’t found this support sooner,” Lau says. 

With this anecdote in mind, Lau encourages all stakeholders in the retirement plan industry to think about whether there are many more people like his father out there. He suspects there are, especially given the fact that building a retirement paycheck is as challenging today as it’s ever been. More so, in fact. 

“When you look at the fact that bond returns are still so low relative to earlier periods when it was easy to just clip coupons as your retirement income strategy, this really puts the pressure on to gain skills and knowledge in this area,” Lau says.

Citing a survey his firm recently conducted, Lau points out that 79% of registered investment advisers (RIAs) say “predictable income” is more important to their retirement-focused clients than “asset growth.” Similarly, 70% of RIAs say these clients “value the certainty of not running out of money” over “achieving a certain retirement lifestyle.”

It is perhaps surprising to see, then, that only 14% of RIAs say their clients strongly like or somewhat like annuities, while more than quarter (27%) of RIAs “aren’t sure” what their clients think.

If plan sponsors could take one action based on these results, Lau says, it should be to ensure that participants understand the limitations of bucket strategies and rule-of-thumb income strategies such as the 4% rule. He also encourages plan sponsors to educate participants about just how diverse the annuity product set actually is.

According to Lau, single premium immediate annuities (SPIAs)—the classic annuity structure people commonly think of, in which the full cash value of the annuitized portfolio is given to the insurer up front—represents only about 4% of the annuity marketplace.

“In reality, where the bulk of income generated out of annuities is coming from is out of variable annuities, or increasingly, fixed annuities,” Lau says. “With this approach, the income is in fact paid out through a rider, which means that the annuitized assets retain a cash value for the retiree, which depletes slowly over time in direct relation to the amount of income that has been paid to the individual. I think that better understanding about this fact will really drive greater use of annuities, because it is the immediate loss of control using SPIAs that makes people hesitant to annuitize.”