Where to Begin Building the Retirement Income Puzzle?

Earlier this year, the COVID 19 pandemic and the accompanying market volatility had drawn away some of the attention plan sponsors were paying to retirement income, but their focus has started to return, said Lorie Latham, CFA, Senior Defined Contribution Strategist at T. Rowe Price. “Retirement income is a central theme with us, and with our clients and prospects across the board.”

The passage of the SECURE (Setting Every Community up for Retirement Enhancement) Act and the Department of Labor’s interim rules on lifetime income disclosure have encouraged plan sponsors to move forward on retirement income, said Latham, speaking at Pensions & Investments’ Retirement Income virtual series. “How far our plan sponsors are on the spectrum for implementation or exploration depends on the industry or sector they're in and, more importantly, how they've been impacted by the pandemic,” she said. Some clients have already implemented a solution or are on the brink, and the pandemic hasn’t deterred that process, while others are wanting help with understanding the retirement income landscape and how it can be relevant to their plans, she noted.

“Broadly, regardless of where sponsors are on the solutions journey, there's a common desire to seek help in determining how to build a retirement income framework and how to assess these offerings relative to their plan needs,” said Latham, speaking on the session titled ‘Examining the World of Retirement Income amidst Chaos.’ Rather than focusing on the word ‘chaos, she suggests a sentiment shift is needed. “I understand we’re all operating within a world of disruption. But it's critical to see past the current noise and be very clear and deliberate about what you want to accomplish on behalf of your participants.”

Plan sponsors should have an evaluation framework to explore retirement income in a constructive and effective way, Latham recommended. “We always guide our clients to focus on their unique plan objectives and what they know to be their participant needs and to work backwards from there. We see quite a bit of interest in a suite of solutions, for choice based on an individual's unique preferences and circumstances,” she said.

Plan sponsors who are evaluating retirement income solutions for their participants are going through quite lengthy and complex cycles, Latham said. “We think this process is very much a beyond-products endeavor, and a mind set for plan sponsors. And often, that involves bringing in both the Benefits and HR teams to collaborate on this process.”

The SECURE Act ticked some of the boxes that needed to be checked for the use of annuities– such as the safe harbor and portability provisions—but plan sponsors should also remain attentive to the idea of choice for participants. “We know that older participants tend to be more engaged, have more complex situations, and have unique sets of objectives and needs. Their asset profile also looks quite different, so applying the same default approach to build assets in the savings years is likely going to fall short as the right answer for the retirement phase,” she said.

Latham also pointed to the idea of phasing in offerings as a natural part of the process. Recent T. Rowe Price research bears out the high interest by plan sponsors in moving forward on what's referred to as the ‘low-hanging fruit,’ easy levers that participants can use to build a portfolio in retirement. “That could mean reframing current offerings such as stable value or fixed income, reorienting other levers already in place to be part of that suite of offerings, and then making additions as part of a next phase.”

Before getting to the suite of solutions, framing the plan objectives and understanding participants’ needs is key, Latham said. Plan sponsors should start by making baseline decisions around whether they want participants to remain in the plan at the point of retirement and, if so, adapting the plan’s governing documents and enabling the plan to be able to take partial distributions and systematic withdrawals, she said. Latham also shared that T. Rowe Price research asked 3,000 participants across generations if they were given offerings to generate income in retirement, would they stay? 81% of Millennials, 77% of Gen X, and even 70% of Baby Boomers said yes, Latham said, noting the high numbers were a bit of an eye-opener and can be informative for those sponsors exploring their preferred approach

“There are a lot of different ways to think about how participant preferences could map back to a solution set,” Latham said, noting that plan sponsors can do a clear assessment of what they already make available in the savings tier such as stable value and other fixed income option for the retirement tier. From there, consider what the investment committee is comfortable with: “Guarantee vs. non-guarantee, in-plan vs. out-of-plan? Consider how it may map back to the QDIA, such as a QDIA that offers a manage payout solutions it an outside platform from an annuity perspective? . How do you want to make those offerings available? There are many ways to frame and think about solutions that solve for various objectives."

“I actually can't think of anything more unpredictable than knowing one's lifespan. So, we take the view that it's vital to ensure that longevity risk is accounted for to avoid a shortfall and what often may be an individual living decades in retirement. And we believe deploying a conservative portfolio too soon to avoid that short-term cyclical draw-down most assuredly can lead to a short-fall.” Latham said the bottom line is “We believe there has been significant evolution about the way we should think about the retirement problem, thus the way we approach the solution should evolve as well”.

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