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.

Depending on type of investment option chosen, different distribution methods are available. There are essentially three ways, as shown in the box.

Regarding the third approach, the lifetime payout option, there are two types: fixed and variable. Fixed payouts can offer a degree of stability. On the other hand, variable payouts offer the potential for an inflation hedge via the diverse line-up of subaccounts inside the variable annuity and the asset allocation strategy that this makes possible.

Additionally, variable lifetime payouts with living benefits/guarantees offer necessary growth potential to boomer clients who may not have accumulated sufficient assets to support an income stream from interest/dividends alone. Guarantees (backed by the claims-paying ability of the issuing company) offer the protection clients need to help ensure they can remain in the market and manage the risk to their portfolios while retired.

Thus, with the availability of optional riders for an additional cost, clients have the opportunity to maintain a degree of control over the asset, as well as certain guaranteed minimum payout amounts.

Since an IRA rollover already offers tax-deferral, careful consideration should be given to using an annuity as a funding vehicle within an IRA, and to the timing of the distributions–i.e., how soon will clients start taking income?

Advisors must help clients evaluate the cost/value of the benefits and features of annuities and the extra protection offered by optional riders. The critical objective is to make sure clients have retirement income they cannot outlive, especially for core expenses.

To do this, take an income inventory. Evaluate client assets and contributions. What are their expenses and goals? Next, ensure that the money maintains or exceeds the pace of inflation–the true definition of money is purchasing power. Finally, establish an efficient means to transfer wealth to clients’ heirs or charities.

As the Pension Protection Act changes the American retirement landscape and millions of boomers sprint to retirement, be prepared to help clients take assets from their employer-sponsored retirement plans and turn them into lifetime retirement income. Identify the issues, concerns and risks they face. Position the retirement distribution approach. Present the concepts. Illustrate the solutions, and find the best fit for their needs.