At TIAA-CREF, we think turning 100 deserves recognition. Our CEO, Roger W. Ferguson, sends a bouquet of flowers to each of our plan participants when they reach the century mark. It's a simple gesture to honor a remarkable life. Amazingly, we send out between 30 and 40 of these birthday bouquets every month. And we're not stopping anytime soon. We have 22,000 clients between the ages of 90 and 100 — and another 94,000 between 80 and 90.
This isn't just a testament to TIAA-CREF's heart, it's also a testament to the increasing longevity of the American people. A couple at age 65 now has an 89% chance of one spouse living to 85, according to TIAA actuarial projections. Longer lives are reason to celebrate, for sure, but also reason for workers to ask: “Can I afford to be retired for 30 years or more?”
Many defined contribution plans in the not-for-profit sector — educational institutions, charities, hospitals, churches and the like — have an answer to this question. Not-for-profit defined contribution plans commonly help to mimic defined benefit pensions by focusing on lifetime income. They also typically incorporate guaranteed retirement income products and provide communication, education and advice that can help keep participants focused on monthly retirement income rather than on lump-sum savings. Defined contribution plans in the for-profit sector would do well to emulate these features.
For simplicity's sake, when we talk about defined contribution plans in the not-for-profit sector, we're usually talking about 403(b) plans, as opposed to the 401(k) plans that are widely used among for-profit companies, although non-profit institutions may also offer 401(k)s. Both plans share common features, such as retirement savings funded through employer and employee contributions, but there are differences.
The most important distinguishing feature of 403(b) plans is that they were designed to provide lifetime income for people in retirement. In fact, when 403(b) plans were first authorized in the 1950s, they could only offer annuities. The restriction ended in 1974 with the passage of the Employee Retirement Income Security Act, but the focus on lifetime income in 403(b) plans — and thus throughout the not-for-profit workforce — remains strong. 401(k) plans, on the other hand, were originally introduced as a way to supplement the retirement income workers could expect from their defined benefit pensions.
Given their long focus on annuities, 403(b) plans typically offer an in-plan annuity to which workers can contribute over many decades. Having an in-plan annuity option is important. While anyone can annuitize a portion of their retirement savings when they reach retirement, research shows that people who contribute to an in-plan annuity during their working years are much more likely to annuitize when they retire, according to “Retirees, Annuitization and Defined Contribution Plans,” by Paul J. Yakoboski, (a Trends and Issues report of TIAA-CREF Institute, April 2010).
People who don't annuitize can access a number of drawdown products and strategies to try to avoid running out of money in retirement. But even the most prudent drawdown strategy might leave retirees vulnerable to longevity risk and market fluctuations. Only annuities provide guaranteed income for the rest of a retiree's life. As insurance products, annuity guarantees are dependent on the claims-paying ability of the company that writes the contract. But that contract goes a long way to ensuring the retiree will continue receiving regular monthly payments for as long as he or she lives.
Regulators have taken note. An Internal Revenue Service notice, issued Oct. 24, 2014, and a Department of Labor information letter, issued Oct. 23, 2014, are paving the way for the use of deferred annuities within target-date funds held in defined contribution plans. Hopefully, this will encourage the use of annuities within TDF-qualified default investment alternatives as a best practice across defined contribution plans.
Offering annuities in 401(k) plans would be a strong step toward enhanced retirement security, but only a first step. Defined contribution plans place the responsibility on individuals — who usually have no financial background — to select investments and then monitor their performance. They need help. In the not-for-profit sector, most plan sponsors offer personalized engagement strategies and advice to help employees make fund selections and other investment decisions with retirement income top of mind. This should be standard practice for every defined contribution plan.
Whether they are saving through a 401(k) or a 403(b), workers love to see account balances grow. But retiring with a large account balance can give a false sense of security. Without knowing how long they will live, there's a possibility that even with a large nest egg, plan participants will outlive their savings.
A better focus for savers is to think about how much monthly income their savings will generate. The traditional rule of thumb is that retirees should be able to replace 70% to 100% — often at a minimum, given high expenses at the onset of retirement for some — of their working income through a combination of Social Security, pensions and private savings. Retirement plan providers can reorient workers in this direction by including projected monthly income on quarterly account statements — a practice that is picking up steam in the defined contribution market.
As 401(k) and 403(b) plans continue to converge in their operational and administrative aspects, it's easy to think of them as essentially the same product. But the divergent history of the plans — one a way to generate guaranteed lifetime income, the other a supplemental retirement savings vehicle — has left many 403(b) plan participants better prepared for a defined contribution world in which individuals are chiefly responsible for providing for their own retirement income needs. To help Americans get more out of their longer lives, 401(k) plans should take a page from the 403(b) playbook — ensure that savers aren't just thinking about how much money they'll have the day they retire, but how much income they'll have every month for the rest of their lives.
After all, what better way is there to celebrate a 100th birthday than with a monthly income check? n
Teresa Hassara is the Waltham, Mass.-based president, institutional retirement, of TIAA-CREF.