How Can US DC Plans Deliver a Lifetime Income Solution?

Seth J. Masters

The federal government wants to make it easier for employers to offer lifetime income solutions in retirement plans. My colleague, Mark Fortier, offers an interesting approach to doing so.

In a recent Bloomberg interview, J. Mark Iwry, senior advisor to the Secretary of the Treasury and deputy assistant secretary for retirement and health policy, discussed how new proposals from the government would make it easier for employers to offer annuities and other lifetime income solutions in retirement plans.

While it’s currently hard for people to understand, evaluate and choose lifetime income options, Mark says, “It can be a lot easier for individuals to navigate the system when their plan (the employer) has arranged for retirement income options. Greater involvement by plan sponsors may mean more bargaining power and professional assistance for employees.”

Today, most DC plans are solely focused on helping workers accumulate savings, not securing a steady retirement income. So we need to change the DC focus from savings to savings and income. While many workers already have the ability to convert their savings into lifetime income by purchasing a traditional fixed annuity, they rarely do so, as noted in a previous blog post.

The crux of the challenge for DC plans involves two issues: providing participants with certainty about what they can’t manage (market risk and how long they live), while simultaneously giving them control over what they can manage (their savings and retirement age).

A type of insurance called a guaranteed lifetime withdrawal benefit (GLWB) can address these risks, because it guarantees a minimum income based on accumulated assets, and the income never falls below that amount. If there are equity assets in the underlying portfolio, it can also provide added growth, which could boost the minimum income and might provide some defense against another long-term risk: inflation.

By incorporating a GLWB into a plan’s qualified default investment alternative (QDIA), plan sponsors would automatically be providing participants with the simplicity and security that they seek.

Automating access to secure income solutions can provide a simple route to lifetime income that is helpful for “Accidental” investors who are less comfortable with decision making. It can also alleviate ambivalence toward annuities by allowing retirees to control their assets—and pass remaining assets on to their beneficiaries. Such a secure income can also reduce the stress that both Accidental and “Active” investors feel in prolonged market downturns.

But secure income solutions have to appeal to plan sponsors, too. As part of a company’s benefits package, secure income solutions can help attract and retain top employee talent. They may also make employees feel more prepared to retire, rather than delaying retirement because they’re worried about falling short financially later on. And less anxiety can support productivity. So this type of secure income solution could be a win-win proposition for a company and its workers.

That leaves the big question: would employees actually say “yes” to this approach to secure income, even though they shy away from traditional annuities? I’ll look into the answer in a coming blog post.

“Guaranteed Lifetime Withdrawal Benefit” (GLWB) is a type of annuity that sets a withdrawal amount that will last throughout a participant’s retirement, even if the market falls or the account’s assets run out. The insurers will continue the withdrawal payments, if needed. Guarantees are based on the financial strength and claims-paying ability of each insurance company.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio- management teams.

Seth J. Masters is Chief Investment Officer for Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein, and Mark N. Fortier is Head of Product and Partner Strategy for AllianceBernstein Defined Contribution.

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