Lifelong income solutions for defined contribution plans are on the way. With defined benefit plans waning and life expectancy waxing, more retirees will need more guaranteed income than Social Security can provide.
“Shrewd money management and market gains alone cannot possibly keep pace with the unprecedented rise in average lifespan,” New York-based consulting firm Strategic Insight asserts in a new report.
Product developers are doing their part, coming up with new ideas, but obstacles remain. The obvious solution — individual annuities — is “not desirable” to many advisers and investors, according to Strategic Insight. “A lot of advisers consider annuitization to be ‘annuicide,’” Tamiko Toland, the firm's managing director of retirement income consulting and the primary author of this report, said. “The assets are no longer within the control of the adviser and do not contribute to the adviser's earnings.”
Not only are advisers cool to lifetime annuities, individual investors generally have been reluctant to buy them. Nevertheless, annuities may find their way into DC plans, especially via target-date funds.
Target-date fund-based solutions are leading the way in product development for DC income guarantees, largely because they are eligible for use as qualified default investment alternatives. That is, sponsors of DC plans such as 401(k)s may direct contributions of participants who do not choose investments into prudently-selected QDIAs such as target-date funds without bearing liability for losses.
Some target-date funds in DC plans offer a lifetime income guarantee, often through a variable annuity, and the U.S. Department of Labor has stated that the implementation of guarantees does not affect an investment's eligibility as a QDIA, according to Strategic Insight.
The report indicates that it may be awhile before many DC participants voluntarily select guarantees. “For the time being,” Strategic Insight concludes, “the only sure path to gathering assets within in-plan guarantees is through QDIAs ... we now see that the bulk of product strategies revolve around a QDIA-based approach.”
Whether plan participants wind up in lifecycle products such as target-date funds voluntarily or by default, they eventually may be able to tap their DC accounts for guaranteed lifetime income.
Donald Jay Korn is a contributing writer for Financial Planning, a SourceMedia publication.
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