By BEN THOMASON and BEN MUENCH
A 401(k) plan has long been considered the entryway to investing for retirement. Over time, hard-earned money has been saved, compounded, and grown. But what happens when investors are nearing retirement age, or when it’s time to take the money out?
During this period, doing the right thing for their nest egg is more crucial than ever. Unfortunately, for those plan participants who are approaching retirement, there’s no clear-cut “soft landing” for their 401(k) investments. The accumulation phase — the long road of disciplined savings — now seems like a walk in the park compared to new worries about turning that savings into income in retirement.
As an advisor, this is important not only because it affects your clients, but because it is a topic that is likely going to see a lot of traction in the not-so-distant future. Just a few months ago, Representatives presented the Increasing Access to a Secure Retirement Act (H.R. 1439). This bipartisan piece of legislation “clarifies and strengthens existing rules to make it easier for retirement plan sponsors to provide guaranteed lifetime income products as part of their employee benefits.” According to the Representatives, only about 10% of U.S. retirement plans currently offer guaranteed lifetime income products.
Wanted: A “Nearing” Retirement Strategy
We agree the marketplace needs better strategies and workplace systems when it comes to post-401(k) money management options. However, we also believe the industry needs better strategies during the “nearing-retirement” stage. Unfortunately, many employers don’t have the tools or incentive to assist their employees with this period of time. Many also feel handcuffed as there are no clear cut fiduciary safe harbor protections, similar to the kind offered during accumulation, to encourage employers to start rethinking this near-retirement conundrum. Therefore, plan sponsors generally offer little, if any, help when it comes to managing balances around retirement time. This is a huge opportunity for advisors, as they can assist plan sponsors with bigger picture opportunities, while assisting participants with their individual near-retirement needs.
Introducing the Managed Outcome Plan
A “managed outcome” plan is one solution that could provide a sufficient lead-up to garnering income in one’s retirement years.
Just like with managed investments such as Target Date Funds (TDFs) that are geared towards savings, a managed outcome plan option for those nearing or entering retirement could meet criteria based on a person’s age, years in retirement, and desired lifestyle.
Managed outcome plans seek to achieve specific objectives, such as target returns, risk mitigation, protection of asset values while nearing retirement, and guaranteed levels of income while in retirement with the ability to customize by individual participant designed to meet their own needs.
Worthy Mention: The “Negative” Enrollment Option
Another possible solution could be to offer a “reverse” enrollment option for those nearing retirement. Under this option, some percentage of current funds and future contributions would be automatically invested in managed outcome plans geared towards protecting the accumulation that has been built while still offering the potential upside of market participation and the benefits this can provide to avoid sequence of returns risk. This is the risk to sustain a fixed standard of retirement income if the investment portfolio experiences large negative returns near retirement. And, plans could be tailored to include an auto-enroll function rather than wait on the participant to choose. Analysis Paralysis shows that when presented with a confusing option versus doing nothing at all, most will often do nothing; this behavior could jeopardize a participant’s retirement savings and future income.
Employers Can Get Onboard
One overriding solution is to provide employers with a level of fiduciary protection in providing these solutions. For example, fiduciary relief could be extended to sponsors if they offer auto-enrollment systems like the ones we find in the accumulation phase. Participants could elect for plan managers to oversee a certain percentage of their 401(k) balances via a managed outcome solution; plan sponsors may like this option, too, as it absolves them of certain fiduciary obligations.
Plan sponsor protection, in addition to participant guidance, would focus on participants’ options based on their time until retirement and could help them make better choices when it comes to spending and earning during those years.
Congress Can Get Involved, Too
These solutions won’t be mandatory unless advisors, retirement plan providers, plan sponsors, record keepers, and investors demand more choices and opportunities to better manage their 401(k) funds in retirement. And what better way to enforce the solutions that are available to the majority of investors than by making it law?
Back in 1978, Congress passed the Revenue Act, which created the ability for employees to avoid being taxed on deferred compensation. Since then, Congress also passed the Pension Protection Act in 2006 to ensure that employees receive their full pension payouts.
Now, it’s time for Congress to enact rules that can assist individuals as they transition their 401(k) assets into retirement.
According to AARP, from now until 2030, an estimated 10,000 baby boomers will reach retirement age every day — that’s seven baby boomers hitting age 65 per minute. They must be prepared to make the critical transition from accumulating assets to withdrawing them. And those withdrawn funds may need to last for ten, 20, or even 30 or more years. As an advisor, many of these baby boomers will be turning to you which is why it’s important to acquaint yourself with the strategies and costs of these products, as well as upcoming legislation that could provide lift during this pivotal time.
It is also important to think about the strategies that would benefit your clients. Our industry — including investment companies, insurance companies, financial professionals, plan sponsors, and regulators — must help create more sound withdrawal strategies to match our retirement strategies. Managed outcome plans and negative enrollment options can be simple, practical ways to help participants manage withdrawals and prepare for their lives beyond retirement.