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In-plan decumulation programs are essential options in a retirement plan to help plan participants manage risk in retirement, experts at the 2022 PLANSPONSOR National Conference said.
Decumulation programs assist participants in understanding how many years their accumulated retirement plan balances will last into retirement and can translate accumulated dollar amounts to monthly or periodic payments.
Defined contribution plan participants face difficult decisions before, during and into retirement with regard to stretching their retirement account balances into lifetime income, according to industry experts at the conference. With the lifetime annuity offered by traditional defined benefit pensions now uncommon for most private-sector workers, there is a growing need for retirement income options, said Barbara Delaney, principal at StoneStreet. She called the absence of lifetime income a “big gap” in the retirement industry.
Plan sponsor Navy Federal Credit Union includes an in-plan retirement income option for participants. Emily Fahim, NFCU’s assistant vice president of benefits, detailed the program, which partnered with Fidelity Investments. The plan sponsor implemented the Fidelity managed retirement funds, “which are like target-date funds that work for people in retirement,” she said. Unlike annuities, the Fidelity funds are not guaranteed products.
The program includes modeling tools that use mortality assumptions. Participants can, like the target-date fund glide path used when investing accumulated assets, use the managed retirement fund to automatically de-risk as participants near retirement age. Select the age “you think you’re going to live to,” Fahim said.
“Unlike an annuity where you’re locked in [and] you buy it for life, there’s still flexibility,” she said. “This will say, ‘Okay, based on the amount you have, based on the assumptions you made, we’re going to send you $1,000 a month each month.’”
Participants can withdraw additional amounts for expenses, home repairs or other costs, she added. “[If] all of a sudden, the next month you need more than that, you can always pull extra. Then it recalculates and then helps you figure out, ‘Okay, what should my new monthly amount be as I go forward?’” Fahim said.
She also noted that Navy Federal is currently encouraging employees to examine the program. “We’ve done targeted communications for 50-plus [workers], so [that] they realize this is an option,” Fahim said. “We are finding some people now are leaving their money in the plan because of the ability to do this. We’ve had really good success and people that are approaching retirement like that they have guidance or [a] person to help them figure it out.”
Thinking among plan sponsors has started to change, with employers approaching retirement plans as not only tools for asset accumulation, said Ruth Schau, senior director at Pacific Life Insurance Company’s Pension Solutions Institutional Division.
She explained that it “makes sense” for plan sponsors to approach the plan as a means of “having access to lifetime income within a retirement plan” and as a risk mitigator against fraud. “People are very vulnerable to a lot of different risks in retirement, and one of the bigger ones that I’ve seen these days is fraud,” she said.
Fahim related that elder financial fraud is often a concern for older people and their families, and that guaranteed products can lessen the risk of it.
“I think of these as being also fraud protectors: Nobody is getting them,” Schau said. “You’re going to get this money monthly; you could lose it to fraud on a monthly basis and give it to someone, but next month it’s getting replenished.”
Retirement income investments—including investment products such as qualified longevity annuity contracts, a type of deferred annuity—function as a license to spend in retirement, Fahim noted.
Lifetime income contrasts with life insurance because “buying guaranteed lifetime income, or an annuity, is almost the opposite of life insurance,” Schau said. While the income stream created by an annuity is spent in the lifetime of the plan participant, life insurance proceeds are spent by their beneficiariesLifetime income is important to consider in this context. Individuals who annuitize portions of or their entire retirement balances or tap another retirement income option will consume the investment product, she explained.
“When you’re buying lifetime income, you’re hoping you actually get to use it, you want to use it for a long time and you’re benefiting yourself, because you’re managing risk,” she said. “The one thing about life insurance is you’re paying for it but you personally will never benefit from it. In fact, you’re paying for something that you hope no one will ever have to use. But again, you’re managing risk.”
Schau added that many people underestimate how long they will live. Therefore, these individuals are vulnerable to longevity risk, or running out of money in retirement if they didn’t save enough or plan for health care costs sufficiently. A 2020 study from the Center for Retirement Research at Boston College found that “retirees underestimate their life spans and their health costs in late life.”
Individuals who plan to retire between ages 65 and 70 could have to figure out how to manage their money and make it last for 30 years, Schau explained.
“Especially if you’re married and have a spouse, one of you is likely to hit 100,” she said. “I’ve seen that if you live long enough, you’re going to spend all of your defined contribution money, it will be gone and then you have nothing left. At age 90, you’re unlikely to go and get that part-time job—you don’t want to be at your most financially vulnerable position … anywhere from 80 to 90 or beyond—it’s just not a good thing.”