In the waning moments of 2019 in the “before times,” the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed, which created safe harbors for plan sponsors who wished to create guaranteed retirement income solutions within their defined contribution plans.
Early returns would seem to indicate that more protections are not the only hurdles for guaranteed retirement income in the defined contribution space. The addition of retirement income solutions appears to be moving (barely) towards broader availability.
The benefits of guaranteed retirement income are indisputable.
- Eliminates investment market risk
- Increases retiree spending since income is guaranteed and not variable
- Eliminates longevity risk
- Reduces cognitive risk to retirees as they age
A successful guaranteed retirement income solution for any individual requires less money than a discretionary periodic drawdown model. This is because, under a guaranteed retirement income solution, longevity risk is shared with others. In a fully funded drawdown model, the participant must protect against their unique longevity risk. Creating a drawdown model protected from market risk and will last pass the age of 100 is costly.
So, if the benefits are clear and the costs lower, why do so few participants elect retirement income, and as a result, so few employers provide guaranteed retirement income solutions? There are still real hurdles for guaranteed retirement income to clear.
Complexity – Every five years or so, a new survey emerges where participants inevitably demonstrate how little they understand about investing, compound returns, and retirement planning. These issues are far simpler to understand and navigate than the world of insurance, which is where guaranteed retirement income generally lives. The last 10 years have seen a broad proliferation of disclosures and tools to try and increase understanding of investing and there is no evidence that baseline levels of awareness have changed. That doesn’t bode well for guaranteed retirement income.
Ownership – By the time many Americans retire, their defined contribution assets will exceed their home equity. The notion of ceding control of 30 years of saving is a significant hurdle towards the utilization of guaranteed retirement income solutions. A large pool of invested assets gives participants more flexibility to increase or decrease spending as life dictates. It is also true that many parents want to leave something to their heirs when they die. The current defined contribution system nearly guarantees that a participant that has saved enough will pass with money to leave.
Language – Brokers and insurance companies have for decades created and misled Americans into buying expensive annuities with the promise of both market appreciation and guaranteed returns. Many of these products have been bad and have done little more than enrich the broker that sold them. Annuities have earned the negative reputation it has in the market. Almost every guaranteed retirement income solution has an annuity component to it. And while all annuities, thankfully, are not created equal, most knowledgeable investors quake in initial fear when the term annuity arises.
There are workable guaranteed retirement income solutions in the marketplace, and the solutions will continue to improve with each iteration. With these improvements, more employers will want to provide more optionality around retirement income within their plan.
In the coming months, we will be providing more education and context around the concepts and products in the retirement income marketplace. In the meantime, please feel free to reach out to a consultant for the latest developments in retirement income.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.