Welcome back to Human Capital! This week, we’re checking in with David John, senior strategic policy advisor at AARP Public Policy Institute and a nonresident senior fellow in economic studies at the Brookings Institution, to drill down on two papers he recently co-wrote on ways to deliver retirement income.
Should all retirees use annuities? That’s one question John and the other retirement experts tackled in their first paper, When income is the outcome: Reducing regulatory obstacles to annuities in 401(k) plans. The second paper, From saving to spending: A proposal to convert retirement account balances into automatic and flexible income, continues that theme and posits that a “default decumulation solution” via managed payout funds may be a more suitable option for some folks. The sticking point: making them widely available in retirement plans.
“The conventional wisdom is that everyone should be in an annuity, but in the managed payout out paper we address the question: Is that the right vehicle for everyone?” John told Human Capital.
What’s a managed payout fund? John and his colleagues describe it as “a major alternative to an annuity,” stating the diversified pool of investments is designed to produce a relatively consistent level of annual income but, unlike an annuity, doesn’t provide a guaranteed outcome.
The funds are similar to target date funds (TDFs) “but have a different objective,” John and his colleagues say, in that TDFs typically invest in a mix of asset classes, including diversified equities and bonds.
Distributing income “is not necessarily” TDFs’ objective, whereas managed payout funds serve as “decumulation vehicles, paying monthly or quarterly cash distributions to retirees.”
Managed payout funds’ strategy: “To generate regular investment earnings and gains for income with carefully managed risk to reduce losses,” according to John.
The funds act as a “default decumulation solution that could be added to retirement plans to simplify decumulation choices” much like auto-enrollment, contribution and investment allocation decisions have worked for savers.
The goal is to use managed payout funds to deliver monthly income “that is likely, though not guaranteed, to last a lifetime,” according to John, coupled with longevity annuities that begin to make payments when the owner reaches an advanced age.