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Retirement Planning > Spending in Retirement > Income Planning

Defined contribution plans need income planning options, says new organization

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A new trade group, formed in 2008, sees potential in offering income planning options in defined contribution plans. Called the Institutional Retirement Income Research Council (, the Hartford, Conn.-based organization is completing its first year of operations now. A self-described “think tank,” it is underwritten by Prudential Retirement, Newark, N.J.

Going forward, plan sponsors will have an even greater need for in-plan income options, according to IRIRC Co-Chair Martin Schmidt, a principal with MAF Advisors, Chicago.

This tracks with the growing importance of ensuring a lifetime income in retirement, he says, and also with the simultaneous nationwide transition to defined contribution (DC) plans, which are supplanting defined benefit (DB) plans as the main means of saving for retirement.

The ability of advisors to help consumers ensure a stream of income in retirement is becoming more important, agrees Paula Hogan, a fee-only advisor with Hogan Financial Management, Milwaukee, Wisc.

Just having a “pot of income” will not be as important as “preserving a standard of living,” she adds.

Creating a “base layer of income” is going to be important going forward and any income stream created should be inflation indexed, Hogan continues.

But, according to Hogan, any sale of an IA needs to be transparent and should be done through available web sites. These sites should be able to take an application based on age, sex and type of IA requested and put that request out for competitive bid with participating insurance companies, she suggest.

What about employers offering IAs through DC plans such as 401(k)s? The employers should be outsourcing their due diligence to existing versions of such web sites, she says.

Schmidt maintains that plan sponsors will need to be included in the education process, as their need for understanding income planning is increasing with the increase in DC plans.

Indeed, at year-end 2007, DC plans held $4.5 trillion in assets and accounted for 25% of all U.S. retirement assets, according to a report, ‘Defined Contribution Plan Distribution Choices at Retirement-A Survey of Employees Retiring between 2002-2007,’ issued by the Investment Company Institute, Washington, D.C., in the fall of 2008. The report notes that between 1980 and 2005, participants in private-sector DC plans increased from 20 million to 75 million, a nearly four-fold increase, while participants in private-sector DB plans increased by only about 10%, from 38 million to 42 million.

This shift means that plan sponsors now need to understand income planning products and why they need to be added to DC plans, Schmidt continues. Plan sponsors will also need to help participants understand the income planning products and how the products can help employees achieve their goals, he adds.

Toward that end, the IRIRC organized in March 2008. One sign of the need is that the group drew 65 plan sponsors and consultants to its November 2008 meeting, just 7 months later.

The group is developing in 2 phases. Phase 1 focuses on developing the organization structure, such as subgroups, and identifying all the products its needs to examine. Phase 2 will focus on developing a set of best practices.

The early discussions have focused on the importance of income planning and how “individuals near retirement will be gravitating towards guaranteed products that will provide participants with enough income to sustain the “retirement” lifestyle they desire and the ability to continue the consumption of goods and services to which they are accustomed while protecting them from market risks,” according to the IRIRC.

The IRIRC’s first white paper, “A Call To Action,” cites data stating that only 15% of employers with 401(k) plans surveyed in 2007 offered participants a single-premium immediate annuity as a distribution option at retirement.

But, the white paper continues, the problem is 2-pronged. The other part of the problem, according to the report, is that even if there is an immediate annuity option, just 3% of retirees who were offered that option took it in 2007.


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