In the "new normal" we live in today, working Americans must realize that successful retirement planning means more than just putting money away into a workplace savings plan. As important as these plans have become to our system, they are not the complete answer to planning for a secure retirement. The growing responsibility to self-fund retirement must be approached in a comprehensive manner. Individuals must think not only about building up their savings along the way, but how those savings will translate into a sufficient stream of income when they stop earning a paycheck.
Ultimately, retirement readiness is about knowing the end goal and defining the right strategy to achieve the outcome you want, expect and deserve.
Guaranteeing that Americans are retirement ready is not an easy task, given the serious retirement crisis our nation faces. Retirement no longer means the same thing as it did for our parents or grandparents—personal savings, a sizeable company pension check and a dependable Social Security payment. A perfect storm of factors is contributing to the challenge. For starters, people are living much longer. According to a 2011 report from the U.S. Census Bureau, by 2050 roughly nine million people are expected to live beyond the age of 90. This is nearly four times the 2010 population for that same age group.
With the 2008 financial crisis still fresh on our minds, many are understandably worried about another downturn close to or early into their own retirement. Volatile conditions coupled with spiraling healthcare costs, insufficient savings, a looming baby boom bubble and the uncertain future of Social Security, have left people feeling overwhelmed, lacking confidence and looking for a solution that protects against longevity, market volatility and related financial risks.
So what can our industry do? How can retirement plan advisors help advance the retirement readiness of more Americans?
There is a growing expectation that advisors must help educate employers about the benefits of retirement income solutions offered at the workplace. Research from the ING Retirement Research Institute tells us that employees are asking for financial guidance, and are increasingly looking to their employers as a resource. For example, ING U.S. found that more than eight in 10 workers would view their employer more favorably if that employer offered greater comprehensive retirement and financial benefit options, such as an in-plan guaranteed income solution. More than half would feel like their employer had their best interests at heart if retirement planning guidance was offered through their job.
Such research suggests it makes good business sense for employers to consider providing these options. Readiness programs can complement broader workplace benefits, much like well-rounded health and wellness offerings. They can serve as a way to attract and retain talent; improve workplace satisfaction and productivity; help employees successfully transition into retirement at a normal retirement age; and ease the challenges caused when other benefits, such as traditional pensions, are scaled back or eliminated.
Employers will also be looking to their advisors for support in the ongoing monitoring and measurement of a program's success—at both the plan and participant level. Those advisors who recognize the important role they play and can adapt sooner than later to the changing landscape will be better positioned to demonstrate value to their clients.
Three Elements of a Secure Retirement Income Program
An in-plan retirement income solution can provide retirees guaranteed income for life, similar to a defined benefit plan. A well-designed solution will include several key elements that can help make your clients more comfortable with their decision to adopt such a plan option while giving participants peace of mind about their financial security. These include the following:
1) Security with Flexibility and Control
An optimal income solution recognizes that participants place value on both income security and retaining flexibility for situations when they need to access their money if circumstances change. A recent study commissioned by AARP on consumer attitudes toward annuities supports this concept. When working Americans were asked why they would not select a traditional life annuity as a retirement plan payout option, 73% cited not wanting to lose control over the money. In the same study, 83% of respondents cited "wanting to keep the money around in case of emergency." This is why an in-plan guaranteed income solution should consider the element of flexibility so that investors can withdraw assets or transfer to other in-plan investment options at their convenience-giving them full control.
2) Easy and Automatic
Many participants find retirement income solutions complicated. As a result, most 401(k) plan investors fail to convert their savings to lifetime income. For this reason, it's important to make the retirement income process easy and automatic. By leveraging an individual's primary retirement savings vehicle—their 401(k) plan—an in-plan solution simplifies an important part of the process by giving employees access to retirement income investment options while they are still in accumulation mode. ING U.S. research tells us more than eight in 10 participants want at least some guaranteed income and like the idea of an option that provides regular monthly income. They also want to have options for income planning before they retire. More than half like the idea of investing in an option while they are actively saving in their retirement plan. The introduction of automatic plan features in recent years such as auto-enrollment and auto- escalation, have helped address the hurdle of human inertia by improving 401(k) participation and savings rates. The benefits of automation can similarly be applied to investments targeting the draw-down phase. It's necessary for an income solution to utilize features that take the guesswork out of retirement planning while minimizing enrollment efforts.
3) Addresses Employer Concerns
One of the biggest concerns plan sponsors have with adopting an in-plan income solution is their expanded fiduciary liability. This liability corresponds to the selection of an insurance company providing the guarantee and the risk that it defaults on the guaranteed benefits. Historically, the Department of Labor's (DOL) fiduciary standard dictated that if an employer wanted to offer an annuity within their retirement plan, it had to be the "safest annuity." Public policy, however, is shaping change to mitigate this risk. The Pension Protection Act of 2006 directed the DOL to revisit this topic and dialogue has begun regarding how to reduce the fiduciary burden on employers. While the DOL has issued a safe harbor for ERISA fiduciaries for the selection of an annuity provider for distribution of benefits from a defined contribution plan, many plan sponsors remain reluctant to undertake the additional liability of selecting an annuity provider. Until new provisions directly address this issue, plan sponsors can consider solutions that mitigate the risk of insurer default. One way is through retirement income options designed with multiple insurance companies. Using a "multi-insurer" model spreads the guarantee among several different insurers instead of only one, further mitigating the default risk and the sponsor's fiduciary liability.
These are unprecedented times. To have a chance at reaching individuals and motivating them to be retirement ready, we need to change the game and focus on income solutions as a piece of the broader puzzle. Those providing, supporting and sponsoring retirement plans at the workplace must understand the pressing need for Americans to be retirement ready and respond with new capabilities that address this need.
Richard T. Mason is president of Corporate Markets for ING U.S. Retirement,
a strategic business unit responsible for the development, marketing and distribution
of retirement products and services for ING U.S.'s 401(k), defined benefit and
stable value clients. For more information, visit http://ing.us