What DC plan members need to know about retirement income

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By Jennifer DeLong and Christopher Nikolich


Jennifer DeLong: In the industry, over the past few decades, we’ve done a pretty good job of helping plan members understand that they need to save, they need to save early and often, and try to save as much as possible. But what’s really missing is that we haven’t done enough as an industry to help plan members understand now how to use those savings and turn them into a stream of retirement income.

One of the things we ask participants in our research is how much do they think they can withdraw from their account per year in order to create an income stream? And the results were really, really disturbing. About half said they could withdraw 7% or more per year without running out of money.

Chris Nikolich: And almost a third think they could take 10% or more. These answers are far from reality and they practically guarantee that they will run out of money in retirement.

JD: And that’s what the retirement industry needs to tackle now.

NC: Absolutely. Let’s make retirement plans on retirement.

JD: Gone are the days of the old defined benefit pension plans, where someone could just go to work and do their job without having to worry about whether they were going to have an income in retirement. And defined contribution has a lot of positive things, but some may also say that the fact that everything is automated has made members think less about their retirement plan and what to do with it.

So Chris, plan members tell us they want the certainty of income or guaranteed income, but is there anything in our research that helps us determine what plan members really want in terms of guaranteed income?

NC: We asked a very specific question, Jen, what would you rather have? First of all, you can’t have guaranteed income without listing on an insurance company’s balance sheet. But once you’ve done that, we asked people, would you rather have a guaranteed income of $50,000 a year but not have access to your funds and not be able to participate in the stock market when it goes up? Or would you rather have $40,000, but have some growth potential and be able to access your funds?

And usually participants always choose more money. Here, an overwhelming majority – two-thirds – said they wanted $40,000 a year, but were unwilling to give up that growth and were unwilling to give up their assets. So participants tell us they want income, but there are caveats or requirements that go along with that and our research shows that they are really important.

JD: We’ve seen it across the industry in many DC plans that have offered an annuity option, where there’s this irrevocable choice that the participant has to make, the response or take-up is usually very, very low. And our research is now really showing that point, and we’re hearing directly from participants saying they want to continue to have that access.

NC: There are structures such as a Guaranteed Lifetime Withdrawal Benefit which gives you a rate of withdrawal, it provides you with income for life. If and when you die, the money is paid by one insurance company or, even better, by several insurance companies. But you have access to your funds for end-of-life expenses. Your beneficiaries have access to these funds if you do not die at age 90 or 100 and you die at age 70. These are all the reasons people don’t buy what is commonly called or understood as an annuity today, and there are ways to address these concerns with a guaranteed lifetime income solution.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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