April 8, 2011

Finding ‘Balance’ in Retirement Income—Prudential’s Christine Marcks: Weekend Interview

The best ways to help people in retirement plans save more, and to get those who aren’t saving to start

“What we’re focusing on,” says Christine Marcks, referring to the leadership of Prudential, is providing a retirement planning option “that delivers guaranteed lifetime income,” and helping retirement plan participants and sponsors to move their attention from looking at the balance in their retirement plans, and instead focus on “how that balance might finance a retirement that will last for perhaps 25 to 30 years.”

Christine Marcks of PrudentialIn an interview with AdvisorOne on Wednesday, Marcks (left), president of Prudential Retirement, noted that the company’s ‘heritage’ is in the defined benefits arena, but it has also been in the defined contribution space since the 1980s. Looking at the demographics of the boomer population and the inadequacy of those balances in DC plans “has not positioned a large part of the population to retire securely.”

Marcks calls the 2006 Pension and Protection Act (PPA) landmark legislation that recognized that DC plans “were not going to get people where they needed to be.” PPA’s enablement of "automatic enrollment, of defaulting into diversified portfolios, and auto-escalation are important components” of a solution, putting DC plans on “better footing,” but points out that the PPA didn’t mandate those features of 401(k) and similar retirement plans—“We don’t have 100% participation rates.”

Instead, she argues that to “complete the picture,” plan sponsors should be given a fiduciary safe harbor status for including a guaranteed lifetime income option in their plans,” perhaps linked to a target date fund “so it happens for you.” Plan participants may or may not have access to personal financial planners, “so giving them a structure that has guidance embedded in it will get them to a more secure retirement place.”

While she is a fan of using the findings of behavioral finance to help guide plan participants to make the right decisions on retirement planning, the truth is, she says, that behavioral finance “doesn’t move the needle in the same way” that auto-enrollment and auto-escalation does.

“If you’re going to be prepared for retirement, you should be putting 15% of your pay away. That’s what it takes,” she states simply but forcefully. The issue with defined contribution plans, she says, is that “the connection wasn’t made between what you were saving and what you would get out” of your retirement savings in terms of a income stream after retirement. By contrast, she note, traditional pension plan participants “knew what they could count on.” That misguided focus on the ‘balance’ in your plan, and not looking at those funds “as a base for the income that could be provided” once retired is, she suggests, "where things have broken down.”

Marcks notes further that for retirement plans that Prudential runs, “We’ve been putting income scenarios on our DC participants’ statements for years, so the focus is on the income stream.” Moreover, she says that when participants see what that projected income stream will be, “we’ve seen people increase their deferral rate by 4 percentage points.”

Marcks says Prudential supports a bill reintroduced in February by Sen. Jeff Bingaman (D-N.M.), the Lifetime Income Disclosure Act (S. 267), that would require similar statements on all ERISA retirement plans. (That bill would require plans to  include“annuity

equivalents” on participants’ statements , that is, “the monthly annuity payment that would be made if the  employee’s total account balance were used to buy a life annuity that commenced payments at the plan’s normal retirement age, generally 65.”)

But Marcks is concerned about more than improving the savings habits of those already in employer-sponsored retirement plans. “Access to a plan is an area of focus for us; roughly half of the population has access to a workplace plan, but half do not.” Those who don’t tend to work for smaller employers, Marcks notes, for whom setting up a retirement plan is seen as difficult. To help address that issue, Prudential is advocating what it calls a Multiple Small Employer Plan (MSEP), “ where you could pool small employers into joining a plan that would give those employers economies of scale.”

“Everybody will probably have to sacrifice” to solve the retirement planning problem, says Marcks, but she closed the conversation by finding a glimmer of hope in the current partisan wrangling over the federal budget. “What’s going on right now with the Republicans—recognizing the big cost of Medicare,” in addition to the other strains on the federal budget and debt, “might be the trigger to get people to start thinking about this.”

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