Retirement income has been a hot topic in the retirement plan industry for a number of years, and the industry is exiting a phase of talking about it and entering one of action as we see a number of products and services built to assist plan sponsors and plan participants as they prepare to turn their savings into income. On a recent webcast, Charlie Ruffel, founder and director of Asset International, spoke with Tina Wilson, vice president and head of product development for MassMutual Retirement Services about an approach plan sponsors can consider to address the subject of retirement income.
Wilson: Can a defined contribution (DC) plan give participants defined benefit (DB)-like security? Yes, it can. But first participants need to understand the challenge and commit to steady investing. There’s no product or solution that can overcome a lack of savings. Second, make sure that participants have access to effective funding choices, and this refers to the investments in your plan.
MassMutual’s RetireSmart Income Strategy is not a product, and it’s not an investment menu choice. It is a holistic approach that helps participants understand their funding needs so they can create a sustainable income stream throughout retirement.
The benefits of a defined contribution plan are personal control and portability. A DB plan provides a sustainable and steady income stream. MassMutual brings the concepts of the DC and DB foundation together in the RetireSmart Income Strategy, which covers participants from the time that they begin their working lives throughout their retirement and provides professional guidance along the way.
There are four building blocks to the RetireSmart strategy. Two of those building blocks will be the foundation for the working years and are focused on creating target funding for retirement, building up that asset base to create the income stream. The other two building blocks will be the foundation for the retirement years and will create that sustainable income stream.
During the working years, participants need a goal—how much income replacement they will need in retirement and how much of that should be guaranteed. The guaranteed income should cover basic living expenses that will last throughout the participant’s lifetime.
Participants should also look at nonguaranteed income sources—taking managed withdrawals from investments at a conservative rate—to help fund more discretionary expenses and provide liquidity and flexibility.
Block one is plan funding aimed at a prescriptive retirement income goal. Just like a DB plan has an income goal and a funded ratio, the RetireSmart Income Strategy targets a specific income goal. It is critical to measure that goal and show participants how to achieve it. It also requires adequate funding. If the person does not save in his or her plan, the strategy will not be useful.
Block two is creating that foundational piece of the portfolio that becomes vitally important as they move toward retirement. One of the ways that they can do that is to use an age appropriate amount of stable value as part of a balanced asset allocation to create a portion of the portfolio that is not subject to market risk, that has a guaranteed perspective interest rate every quarter and can be looked at to fund the guaranteed piece once they hit retirement.
The strategy is agnostic to the type of stable value product utilized. The key is to have a component of the plan that is not subject to market risk in order to preserve that capital, particularly as the participants get closer to retirement. So, very young people in the plan will have little to no allocation to stable value. As a participant gets closer to retirement, that allocation to stable value increases.