Pre-retirees and retirees face substantial challenges with regards to handling their retirement savings in order to ensure they have a dependable stream of income for life.
Although many Americans have taken painstaking measures in order to rebuild nest eggs decimated by the Great Recession, many are inexperienced when it comes to budgeting that money to ensure that it lasts.
A recent research paper suggests that retirement income generators (RIGs) could be used to mitigate the risks associated with the mismanagement of retirement savings and proposes that employers and plan sponsors incorporate RIGs into their defined contribution (DC) plans.
The paper, “The Next Evolution in Defined Contribution Retirement Plan Design,” authored by the Society of Actuaries (SOA) Committee on Post-Retirement Needs and Risks and the Stanford Center on Longevity, strives to act as a reference for plan sponsor fiduciaries seeking to understand their RIG options and the responsibilities that accompany them.
The shift from defined benefit (DB) plans to DC plans has been a difficult one for employees and society as whole. When it was once common for a retiree to be given a certain amount of money at certain intervals, they now have to manage and withdraw savings on their own. Many are not equipped with the financial acumen needed to do so.
Couple that with market volatility, longevity risk, inflation risk, health risks, and a host of other potential threats and you begin to realize that modern American retirement is fraught with a plethora of potential pitfalls that leave retirees — and society as a whole — vulnerable.
The report implores employers and plan sponsors to actively work to address this troubling trend by offering annuities and systematic withdrawals to their employees. Although a recent Government Accountability Office study found that 44 percent of employees reported that they would like an annuity to be part of their retirement plan, only 6.1 percent of retiring individuals elected an annuity as way to generate income in retirement; immediate annuities, represent just 3 percent of the overall annuity market. The SOA found that the usefulness of annuities is underestimated by retirees. If encouraged by trusted employers and retirement plan sponsors, however, this could change.
A recent Aon Hewitt study found the employers who offer RIGs are more the exception than the rule. One reason for this could be the challenges and fiduciary issues that occur when they are offered. Plan sponsors and employers become burdened with both increased administrative complexity and fiduciary concerns.
In order for employers and plan sponsors to offer RIGs, they need to designate a plan fiduciary, typically the employer of a plan committee, and follow the fiduciary requirements under the Employee Retirement Income Security Act (ERISA). Although this obviously creates some added work, it is a relatively low-cost improvement that is highly valued by workers.
The paper determines that by offering RIGs, employers will benefit from an enhanced reputation as well as improved worker morale.