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Retirement Planning > Social Security

Making 401(k)s More Income-Focused

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San Antonio, Texas

There is no income orientation in todays defined contribution (DC) plans, contended Garth Bernard at an annuity conference here. In fact, he said, citing industry statistics, only 2% of plan participants actually annuitize plan assets.

A vice president of annuity product management for MetLife, New York, Bernard spoke during a panel at the annual annuity conference sponsored by LIMRA International, LOMA, and the Society of Actuaries. The panel examined annuity strategies that insurers are implementing to help bring more income focus into 401(k) and other DC plans. The strategies include:

Packaging. Package an income annuity as one piece of a larger puzzle, suggested Bernard. This is what MetLife is doing, he said, noting that the insurer offers pre-retirees education about challenges and risks related to future income goals, tools to use to see future income and associated risks, and product innovation that provides a way for participants to bridge the gap between todays contributions and tomorrows income, he said.

Specifically, MetLife now offers plan participants the Personal Pension Builder. This is a fixed deferred income annuity that serves as a supplemental savings plan to complement the existing 401(k). Participants voluntarily make contributions that buy guaranteed income tomorrow at todays prices, Bernard said. The payouts can combine with mutual fund systematic withdrawals to create the retirement income stream. Commuted value from the annuity may be available after income starts.

The rationale: Typical workers and retirees are confused, maintained Bernard. As a result, many just roll DC dollars into IRAs and then systematically draw down these savings for retirement income. “Thats not good,” he said, “because people tend to underestimate how long they will live. They also overestimate how much money they can take out and theyre not aware of the impact of market volatility.”

By contrast, packaging is more holistic, he said. “The annuity is not the total solution but rather as part of a total program.” That includes education about financial challenges and creation of a framework that evaluates alternatives.

Integrate payout annuities with Social Security. “Our recommendation is to delay taking Social Security benefits until age 70and to use a bridge annuity [in this case, Prudentials Income Bridge Annuity] to provide income during between the start of retirement and start of Social Security,” said Jim Mahaney, marketing director, Prudential Retirement, Iselin, N.J.

The rationale: Social Security alone will not provide enough retirement income, Mahaney said, noting that over two-thirds of people currently choose to take Social Security benefits early, even though the early payout is smaller than payouts starting at the latest possible date. This early payout practice typically results in retirees “self-insuring” the shortfall between Social Security benefits and their needed amount of income, Mahaney said. Then, as costs and taxes rise, the income picture worsens.

By contrast, he said, “a flexible bridge annuity can integrate well with Social Security.” For employees, it is like having a full defined benefit plan for life, he said, and tax considerations can make it even more attractive. In conclusion, he said, people, especially dual-income couples, should review options under Social Security and revisit conventional wisdom regarding things like cost of living adjustments, widows benefits, expenses and taxes.

Combine strengths of defined benefit and DC plans. Another bridging idea comes from Genworth. The approach is to help employees bridge into lifetime retirement income via a variable annuity option inside a 401(k) plan environment, said Brian F. Birmingham, vice president-institutional market strategy, Richmond, Va.

Called ClearCourse, this Genworth option is like other investment options in that it offers liquidity, valuation, cost, rollover and education tools, Birmingham said. It has institutional pricing, too.

But it is different, in that every contribution the participant makes into the option is guaranteed to pay a floor lifetime retirement income, regardless of portfolio performance, for a minimum of 20 years. In growth scenarios, the participant will receive a higher income amount, but in down markets, the participant will receive no less than the floor. Also, during the accumulation period, participants can contribute, withdraw or transfer funds to this option.

Rationale: This takes a long-term approach to asset allocation, said Birmingham. Participants “can stay fully invested,” because they have the comfort of knowing they have the floor guarantee when its time to take income. Another benefit: Genworth expects it may help encourage greater plan participation.

Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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