Why Spending in Retirement, Not Saving for Retirement, is the New Approach for Aging Clients
“Save for retirement” has always been a popular mantra among advisors.
A subtle cognitive shift, however, has the industry looking at how they can better help 401(k) plan participants with distribution retirement – or, put more simply, teach them how to spend in retirement.
Advisors have increasing opportunities to show both participants and plan sponsors a different way to look at 401(k) plans. This new approach could lead to better participation rates and engagement.
The caveat of lump sum payments
CFP Lee Baker confronts this issue regularly as the president of Atlanta-based Apex Financial Services and the current head of AARP Georgia.
Historically, lump sum retirement payouts gave participants control, flexibility and the ability to work with their advisor of choice.
But in Baker’s experience, when clients have full access to a large sum of money, it often “didn’t always last as long as it should have because people don’t always do the right thing.”
More importantly, there is no set answer to this distribution puzzle. Every individual’s retirement situation is unique – which is exactly why different options need to be considered.
“Decumulation strategies have always been part of my conversations,” Baker says. “Studies have shown that it makes sense to annuitize a portion of retirement assets accordingly to have a guaranteed string of income.”
The advisor’s role – and challenges -- in the new modality
Baker says the concept has moved to the forefront as the tidal wave of retiring baby boomers has created a “tipping point.” This is coupled with the fact that boomers are the first generation to have completed the entire process of 401(k) saving, accumulation and decumulation.
So how might advisors evolve in step with the industry?
Baker notes that an accumulation focus has historically meant that, the greater the assets, the more the advisor earns. Advisors now instead must help participants decumulate and “turn a bucket of money into a series of retirement paychecks.”
There are roadblocks, however, for advisors to consider – including a dizzying array of defined contribution (DC) plan options, negative perceptions of annuity solutions and the pending Department of Labor Fiduciary Rule. This last one, if it proceeds as planned, could slow rollover activity and keep participants in employer-sponsored plans. (As of the writing of this article, the Fiduciary Rule has been delayed until June.)
Or, as Cerulli Associates bluntly states in a 2016 report: “The first wave of investors responsible for their retirement paycheck faces structural challenges as they convert their savings into income.”
The research concludes that “the limited adoption of guaranteed income products [limits] the utility of DC plans as an income platform.”
On annuities, Cerulli laments that, “within the variable annuity market, low interest rates have led to insurer exits, declining benefits and plunging variable annuity sales.”
While they predict that the fiduciary rule’s Best Interest exemption might place “additional stress” on this market, Cerulli observes that “insurance companies are transitioning to income-oriented fixed annuity products.”
To help navigate these waters, advisors should partner with plan sponsors and help them understand the issues employees face with retirement.
Baker agrees that the approach is similar to the financial wellness movement, in which plan sponsors invested more time and energy ensuring that employees were financially fit and educated. This same strategy now needs to extend into retirement.
The plan sponsor partnership
Plan sponsors shouldn’t just look at this as the right thing to do, adds Baker. Instead, they should view it as a good employee retention factor. And if employees feel better prepared for retirement, it stands to reason they will be happier.
“The economy is rebounding, and the workplace environment is becoming increasingly competitive,” he says. “When it comes to retirement income solutions, companies should be asking, ‘Do we want to do well for our employees?’”
A solid third-party administrator can also provide additional resources and guidance, says Baker.
This collective support system is necessary, he adds, because he’s already seeing complacent advisors forget that many people had to retire into a down market just eight or nine years ago.
“Education is crucial,” he says. “We shouldn’t be looking at 65 years old as an endpoint for planning. It’s just a milestone before you pass through the door of retirement.”