Boomers, Retirement Plans And Guaranteed Income

Collectively, the baby boomer generation may be facing an uncertain retirement future due to escalating health care costs, increased longevity, fewer defined benefit pension plans, and uncertainty about Social Security and taxes. In fact, boomers bear greater responsibility for their own retirement destinies than any previous generation in the United States.

That opens up an opportunity for the retirement industry to influence the outcome by demonstrating how guaranteed lifetime benefits can fill an essential role within retirement plans.

This is being spurred along by the Obama administration’s recently announced retirement plan initiatives for 2010, calling for lifetime income guarantees in 401(k) plans.

While the retail annuity space has had much success with guaranteed living benefits, the defined contribution market is still in the early stages of testing what innovations would have the greatest appeal to plan participants.

But the core and trailing boomers within 10-20 years of retirement need an in-plan option now–one that will enable them to begin converting accumulated DC dollars to guaranteed lifetime income dollars.

Currently, the industry is focusing on a few different approaches. Here are some:

? Guaranteed lifetime withdrawal benefits. This is far and away the most popular income conversion feature available on the retail annuity side of the insurance business today. Originally, the appeal of the GLWB was its simplicity and lifetime guarantee, although designs have now grown a bit more complicated. But the original appeal may easily transfer into the DC market, especially when married to a target-date fund series (see below).

GLWBs retain market exposure and growth potential as a hedge against inflation. Example: A $1,000 contribution at age 55 may be convertible into a minimum guaranteed annual withdrawal of $55 at age 65. But if that $1,000 grows to, say, $1,800 by age 65, it may be convertible into a minimum guaranteed annual withdrawal of $99 at age 65.

The annual withdrawal is guaranteed for life. So even if the participant’s account balance is eventually exhausted by the guaranteed withdrawals, the annual amount will continue to be paid for life.

Considerations: Although GLWB riders within DC plans may be gaining in popularity, plan participants always need to consider the fees associated with them.

Also, if a market downturn occurs after the withdrawals begin, it becomes increasingly more difficult to grow the account balance. Such growth is needed if the minimum guaranteed annual withdrawal is ever to increase. Without it, the end result may be a level income that is unable to keep pace with inflation.

? Guaranteed minimum income benefits. These annuity features are distinctly different than GLWBs, but they have recently started looking like the GLWBs.

The GMIB guarantees a minimum value that can be converted to a fixed monthly benefit under a traditional lifetime annuity. This minimum value cannot be withdrawn but will not decrease for withdrawals from the account balance that do not exceed a certain amount.