The recently approved Pension Protection Act of 2006 (H.R. 2830) comes on the heels of a “perfect storm” in the retirement industry.
That storm includes the failing pension system, the uncertainty of Social Security, a declining stock market and high profile corporate bankruptcies. All of these had an adverse effect on companies’ defined benefits plans. Now, the PPA could be the final catalyst making defined contribution plans the primary vehicle for most Americans’ retirement income savings.
The legislation will enable millions of baby boomers who are “sprinting to retirement” to save more in their employer-sponsored retirement plans and IRAs.
In fact, the shift towards such plans is already well on its way. For instance, in 2005, investors held $3.7 trillion in defined contribution plans, according to a report from the Investment Company Institute (The U.S. Retirement Market, 2005). That represents 39% of employer-sponsored plan assets, up from 27% in 1985, ICI says.
Longevity poses a significant risk for boomers. Faced with the possibility of spending 20-40 years in retirement, clients may need to stay invested in the market to help make sure their income and assets keep pace with inflation.
Market risk can’t be ignored. Retired clients can’t withstand the impact of market volatility in assets because they can’t offset it with earning power. Protection is as critical for them now in retirement as it was when they were accumulating assets.
To create an appropriate income stream/asset liquidation schedule, advisors need to extend beyond the current needs-based focus and take into account the different risks facing boomers as they look to retire–risks they didn’t bear during the accumulation years. For them, retirement income planning is as much about ensuring a steady, predictable income as it is about managing risk in their portfolios; it requires and encompasses a variety of products and investments.
This variety of products generally becomes available within an IRA rollover program. The additional flexibility gained by transferring DC assets into an IRA may make this a viable strategy in light of the risks facing boomers today.