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Special report: retirement income

More starting to wonder what to do with their bags of cash

New tools being offered to show retirees what kind of options they have

Roberta Rafaloff said no one’s talked a whole lot about decumulation.

With a substantial portion of the U.S. population now reaching retirement age, conversations about how to guide participants through the drawdown stage of retirement are picking up.

A key challenge: Helping baby boomers as well as future generations of defined contribution plan retirees think about their nest eggs as a source of retirement income — rather than a bag of cash.

While the defined contribution plan industry has "done a lot of education around why you should be in a 401(k) plan" it has "not done a whole lot to help educate people on what they're supposed to do with those savings when they get to the age of retirement," said Roberta Rafaloff, New York-based vice president of institutional income annuities for MetLife Inc.'s retirement income and solutions business.

"When you hand somebody their 401(k) balance, which is likely more than they've ever had access to in their life, and say, 'now you figure it out,' that is a pretty onerous task for most people."

There is much work to be done.

In a 2018 BlackRock (BLK) Inc. (BLK) survey of more than 1,000 U.S. defined contribution plan participants, 51% agreed that "it's difficult to know how my retirement savings will translate into monthly retirement income," and 48% said "the thought of having to generate my own income in retirement worries me."

Of the 228 plan executives surveyed, 87% said they feel a responsibility to help.

To help get employees up to speed, service providers and plan executives are giving income modeling and calculators a closer look.

Make it easy to use

When evaluating retirement income projection tools or calculators, an important factor for plan executives to consider is whether a tool can keep employees engaged by conveying its value in just a few clicks, said Shane Bartling, San Francisco-based senior consultant at Willis Towers Watson PLC.

"The employer knows a lot about the employee's situation ... so make that experience personalized for me, and make it relevant, and don't make me input a whole bunch of data to get to a place that gives me value," Mr. Bartling said.

Finding a tool that can present complex concepts in simple terms relevant to participants' lives, like the number of years their savings will last, is also key, he said.

(Willis Towers Watson offers a drawdown calculator, FiT Lifetime, that was built around this concept.)

A calculator that communicates to participants the tax benefits associated with drawing down their money in certain sequences — for example tapping a Roth IRA before other accounts — is particularly compelling, said John Geli, New York-based president of DST Retirement Solutions, a subsidiary of DST Systems Inc.

Other strong features include the ability to incorporate outside assets and account for shifts in spending, like purchasing a vacation home or making college tuition payments, Mr. Geli said.

(DST Retirement Solutions provides retirement income calculators, among other tools, to record keepers, money managers, third-party administrators and broker-dealers.)

In a 2017 survey of 152 plan executives, Callan LLC found that drawdown calculators or retirement income projections were the most popular retirement income solutions offered to participants, outside of access to defined benefit plans.

A Cerulli Associates survey of 26 record keepers conducted the same year found 67% of record keepers allow participants to generate a retirement projection using a tool/calculator at their discretion.

Helping to understand

Introduced in early 2017, Willis Towers Watson's FiT Lifetime tool helps employees understand how long their total savings could last and what they can do to stretch their savings (retirement and non-retirement) and maximize tax efficiencies.

Participants can choose to enter as much data or as little data as they like. Data that Willis Towers Watson can access through employers, like individuals' retirement investments and pay, are entered automatically.

There are other data points that are entered automatically, like life expectancy and the age a participant claims Social Security, which can be tweaked at the user's discretion. The web-based tool can also account for events like purchasing an annuity or a decline in one's standard of living.

The tool is drawing the interest of younger workers, Mr. Bartling said.

"When you give access to technology that shows how the drawdown phase and some of the decisions you make in the drawdown phase are extremely relevant even to the accumulation phase ... we're seeing very high appetite," Mr. Bartling said.

While active workers are the ones now using the tool, Mr. Bartling said there have been discussions about making the tool available to retirees as well.

The tool is being used by 15 employers.

One of the newer drawdown tools comes from BlackRock (BLK) and targets retirees.

Launched last month, BlackRock's LifePath Spending Tool provides retirees with estimates of how much they can spend annually in retirement based off long-term capital market assumptions, mortality risk, volatility, the current age of the participant and savings balance.

Participants only provide part of that data — current age and savings balance.

Intended users are retirees between the ages of 63 and 95 with savings invested in a 40% equity/60% bond portfolio. Participants do not have to be invested in BlackRock's LifePath target-date funds.

The web-based tool is only available now to plans that are BlackRock clients, although it is expected to be available eventually to the public on the firm's website.

Retirees are encouraged to revisit the tool annually for updated spending withdrawal estimates. Other elements that could affect retirees' income levels, like Social Security and spousal income, are not accounted for now but might be added in the future.

Speaking at Pensions & Investments' East Coast Defined Contribution conference in Miami last month, Nick Nefouse, managing director, head of DC investment and product strategy at BlackRock and co-head of the firm's LifePath target-date series, said that the LifePath Spending Tool represents a "back-to-basics" approach for BlackRock, which launched its first target-date fund with annuities in 2007 with "zero commercial success."

"We never had a bad conversation with the (annuities) product, but nobody bought it," Mr. Nefouse said, adding plan sponsors' concerns around portability and fiduciary risk have prevented many from offering in-plan annuities in general.

BlackRock now is trying to educate retirees on how to spend from their target-date funds, Mr. Nefouse said.

Waiting for more

Paul Visconti, New York-based retirement benefits leader at Advance Publications Inc., has been thinking a lot about how to help the media company's 401(k) plan participants​ understand how their savings translate into ongoing income in retirement.

The company already promotes BlackRock (BLK)'s CoRI retirement income planning tool through its intranet sites and is looking at adding other tools as well.

Each year, about 500 participants visit the tool, he said. Advance Publications' roughly $1 billion 401(k) plan has about 10,000 active participants.

Mr. Visconti said the company is waiting to see how the retirement income investment market develops and is using the planning tools as an "interim step" to get employees thinking about their retirement savings as ongoing income.

Before the company started promoting the tool in 2015, the company had many employees who were at or near 50 years old, he said.

Mr. Visconti said he had a sense people weren't sure what to do with their retirement savings. Many people were taking out loans and withdrawals, he said.

The CoRI tool was launched in 2013 to help pre-retirees understand what their annual retirement income could look like.

Estimates are based on many of the same factors insurance companies use to price income annuities, like interest rates, inflation expectations and life expectancy. Like the LifePath Spending Tool, participants are only required to provide two inputs — their current age and retirement balance.

Mr. Visconti said the company is seeing what other planning tools it can add that are "simple enough for people to understand and gravitate toward."

"We're not done yet," he said.

Generating income

To help plan executives get their employees to start to think about their DC plans as savings that need to be used to generate retirement income, MetLife launched its IncomeWorks education program in 2017.

Housed on MetLife's website, the program points active and retired participants to relevant information in the form of retirement planning worksheets, videos and calculators, among other tools.

While IncomeWorks aims to be product-agnostic, the annuities provider does provide information on annuities as a drawdown solution.

In conversations about the program, Ms. Rafaloff said she has heard that plan sponsors are "sort of getting their arms around what the right (retirement income) products are to offer (their) plan participants, and solutions that are just pure education are really what they're looking for right now."

James Veneruso, senior vice president at Callan in Summit, N.J., also urged plan executives to keep an eye on the investment side for opportunities with drawdown strategies. Right now, "education is the low-hanging fruit, so that's kind of leading the charge," he said. "The solution side is that final frontier."

While the solution side might still be evolving, Mr. Veneruso said he is seeing more innovation around strategies like non-guaranteed payout funds, which target a fixed payout rate over a period of time.

Even for plan sponsors that have implemented retirement income investment strategies, education around retirement income is still important, Ms. Rafaloff added.

"If you offer (retirement income products), you must have a robust education program that supports it so people understand," she said.