Guaranteed Lifetime Income Solutions

Sept. 18, 2010 - PRLog -- Americans face two key challenges in planning for their retirement. In the savings accumulation phase, most notably during their working years, individuals need to save a sufficient amount to provide for a more secure retirement. In the retirement income, or payout, phase, they need to generate an adequate, guaranteed source of lifetime income.
The Pension Protection Act of 2006 (PPA) strengthened the savings aspect of retirement planning by supporting the use of ―autopilot‖ DC plan features. However, more needs to be done to help individuals with the payout period. Congress should consider how federal legislation could extend the autopilot concept to the retirement income phase, as discussed below.
At Work
In the past, many Americans who had a workplace plan were able to rely on traditional pension plans to provide a monthly ―paycheck‖ for life. These plans are fast disappearing. Among the roughly 50% of private-sector workers with retirement plan coverage, the percentage covered by traditional defined benefit (DB) plans has fallen from 81% in 1981 to 32% in 2007.1 These plans are being replaced, for the most part, by defined contribution (DC) plans that leave it to workers to put aside part of their paycheck—making them personally accountable for making investment decisions and managing their own nest eggs.
The PPA was intended to maintain the financial strength of DB retirement plans and to increase participation and savings rates in DC plans. With respect to DC plans, the PPA provided support for the usage of autopilot features. Autopilot DC plan features include automatic enrollment, contribution escalation, investment defaults, and asset rebalancing. In addition, the PPA authorized plan sponsors to offer professional investment advice. As a provider of DC plans, Prudential Retirement includes autopilot and advice features in its suite of DC plan offerings.
Early indications are that the PPA has been successful in facilitating the transformation of DC plans into more robust retirement savings vehicles. The percentage of employers that automatically enroll participants increased from 19% in 2005 to 34% in 2007. This is especially significant—when new hires are automatically enrolled in a 401(k) plan, participation reaches about 90% on average, compared to an average participation rate of 78% for eligible employees in all companies’ 401(k) plans.2 2
However, about 78 million employees are not covered by a retirement plan through their place of work.3 One proposal, which would cover about half of these workers, would require employers of 10 or more employees who do not offer their workers an employment-based retirement plan to offer an Individual Retirement Account through payroll deduction. This ―Automatic IRA‖ would include many of the same autopilot provisions that are being added to DC plans. The intent of the proposal is to encourage employee savings while not imposing significant cost or administrative burdens on employers, such as matching worker contributions or discrimination testing.
A complementary proposed solution under consideration is the Multiple Small Employer Plan (MSEP), which would enable groups of small employers to join a single DC plan sponsored by an affinity group or similar organization. By allowing employers to pool their resources under a single plan, MSEPs could provide lower costs and simplified administrative requirements to plan sponsors. Participants would likewise benefit from cost savings via access to institutionally priced investments, as opposed to the retail offerings available in IRAs.
At Retirement
The first wave of Baby Boomers has reached retirement age, and many more will do so in the coming years. By 2030, nearly 20% of the U.S. population will be 65 or older – over 72 million people.4 In addition, people on average are living longer, due to advances in medical treatment and technology, and retirees will have to pay more for healthcare at the same time that they will need to have their retirement savings last longer.
Increasingly, individuals will need to view their DC plan as more than just a savings vehicle—they must also view it as a retirement planning tool from which to generate income to support their retirement. A new challenge facing individuals at retirement is how to invest the lump sum they have accumulated in a way that will provide an assured amount of income for the remainder of their lives. They have a wide choice of investments – stocks, bonds, mutual funds, and more. All involve a degree of risk.
Research shows employees and retirees are confused and uncertain how to invest their retirement nest eggs. Only 25% of Americans are ―very‖ confident in their ability to make good decisions about their workplace retirement plans.5 While most pre-retirees know they need to generate a paycheck in retirement, only a small percentage believe they are well-informed about how to do that; similarly, only a small percentage have a high degree of confidence as to the sufficiency of their retirement income.6 When presented with an automatic approach in their workplace retirement plan to build a guaranteed lifelong stream of income, and knowing they could always opt out, two-thirds of Americans found it appealing.
Source: Prudential Financial's “Impact of the Market Crisis on Retirement Preparedness” and “Profiles in the Retirement Red Zone®: Near-Retirees”, 2009
How Congress Can Help
Congress should build on the success of the PPA by enacting measures that encourage Americans to create guaranteed streams of lifetime income. Within DC plans, Congress should encourage the use of investment options that incorporate guaranteed retirement income features by providing a clear safe harbor for plan sponsors who offer such an investment or choose to designate it as the plan’s Qualified Default Investment Alternative. Plan sponsors understand the need to help employees achieve more DB-like outcomes from a DC plan, and many have expressed the need for more explicit protection in order to take the steps necessary to achieve this result.
A safe harbor should also be available for plan sponsors who make guaranteed lifetime income the default distribution option for at least a portion of employees’ DC account balances. Extending the autopilot concept into the payout phase in this way would:
Help provide protection against the risk of outliving one’s assets and the risk that the investments do not perform as well as anticipated.
Relieve retirees of the confusion and uncertainty they face in managing their retirement funds.
Provide an often-needed personal supplement to Social Security.

For this and other information, please access the participant website or call [877-778-2100] for a copy of the Prudential IncomeFlex Target Important Considerations before investing. Before electing the Spousal Benefit (if available) on behalf of any beneficiary not recognized as your spouse under Federal law, be aware that provisions of the Plan or Internal Revenue Code might prevent, limit or otherwise affect the ability of the beneficiary to receive the Spousal Benefit.
You should carefully review the Prudential IncomeFlex Important Considerations before investing. Product availability and terms may vary by jurisdiction. Subject to regulatory approvals. Prudential Retirement and Prudential Financial are registered service marks of The Prudential Insurance Company of America, Newark, NJ and its affiliates. Prudential Retirement is a Prudential Financial business.

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This does not constitute an endorsement by John Jastremski, The Retirement Group or the author of the book. The opinions expressed are solely those of the author and may or may not be a representative opinion of The Retirement Group or John Jastremski.

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We are a group of financial professionals who focus entirely on retirement planning and the design of retirement portfolios for the corporate transitioning employee.