Drew Carrington: Simply stating that the plan can help with the distribution phase would be an important first step for many plans. For do-it-yourself participants who know what they want, they can access the marketplace. But for most participants who need guidance with spending in retirement, there are a number of ways to tackle the challenges: advice, investment products and annuities.
On one end of the spectrum, you have advice-oriented calculation engines and services where advice is given about an appropriate asset allocation and a sustainable withdrawal rate. Then there are investment products oriented toward producing predictable cash flow in retirement. These typically are designed to be liquid, more familiar and less costly, as well as fitting easily within the context of a qualified retirement plan.
A broad range of annuities exists: immediate, deferred and variable. Some of these solutions exist in plans today. The most prevalent would be a variable annuity, a wrapper around the portfolio that provides a guaranteed minimum withdrawal benefit (GMWB).
These are also not mutually exclusive tools: an advice engine can recommend a combination of investment products and annuities. There are pluses, minuses, challenges and opportunities with each option. From a plan sponsor's perspective, what is available today covers just about everything you could want, but you need to take advantage of it.
Jim Smith: There are product-based solutions and service-based solutions. I don't see a single silver bullet that a plan sponsor can use and say, if we put this product in, it's going to address all our retirement income needs, because the needs at the individual level are so varied.
I think it's important that plan sponsors look at the benefits of a given solution or product for their plan, that they look at the demographics of their plan and consider what best addresses the variety of the needs within those demographics. Maybe there are certain products they want to offer. Maybe there are ancillary services that they can attach to that product offer. It could be as simple as an installment payout option in their plan.
What a plan sponsor wants to offer will vary from sponsor to sponsor. For a company that has both a DC and a DB plan, it could be a very different solution set than a company that has never had a DB plan so the DC plan is the only retirement benefit.
Roberta Rafaloff: It may be useful to think of all the retirement income solutions that are available as a spectrum that runs from maximum flexibility to maximum guarantee. To use Drew's example, a systematic drawdown program would be at one end of the spectrum, offering full flexibility and few guarantees. At the other end would be the annuity offering or a complete guaranteed income solution.
In recent years, we've seen the emergence of many new products that go up and down this spectrum. The issue is that all this competition and innovation does have the potential to cause confusion both for sponsors and participants.
Drew Carrington: Before we go any further, I'd like to pick up on Jim's point about the silver bullet. In the meetings I have with plan sponsors, I find that they are waiting for what I call the magic pink flying unicorn that is going to fly us all to a happy retirement. The magic pink flying unicorn is an amazing beast that will fly us all to a happy retirement! It handles longevity and inflation risks, it's low cost, and liquid. But as long as we are waiting on the magic pink flying unicorn which, by the way, doesn't exist, we are stuck doing nothing. That's a terrible mistake on the part of the industry as a whole.
Jim Smith: That's a really important point. A lot of plan sponsors are saying, there's no perfect solution so I'm not going to do anything. That way I can't do any harm. But I would argue that there are many participants going into retirement today and by not doing something about retirement income, plan sponsors are leaving it up to participants alone. And they know full well that the majority of those participants are not drawing down properly. So I think there is a false sense — and here I would echo Drew's comments — that as there isn't a perfect solution, I'm going to do nothing because it's the wiser choice. What I would say is that you need to make some choices because what is happening now is not resulting in appropriate behavior in retirement.