By: Mitch Shames
The Employee Retirement Income Security Act was passed in 1974 to safeguard retirement income. But, for the past 30 years financial services firms have been focused largely on 401(k) Savings Plans (remember, traditional pension plans are going the way of dinosaurs). Savings vs. Retirement Income; which is it? Obviously, it needs to be both. They go hand in hand; before retirees can generate retirement income, they need to have a solid base of savings.
Given the deluge of retiring baby boomers, the entire industry (from plan sponsors to advisors, to managers and insurance providers) needs to make a quick pivot from focusing on savings alone to focusing on savings and generating retirement income. Recent surveys tell us that retirees are overwhelming calling for these new features in their retirement plans.
While interest in lifetime income is high among plan sponsors and their advisors, there seems to be a hesitancy that is casting a shadow and a general pause over decision making and widespread adoption of these solutions. We suspect this hesitancy is related to:
- the number of new products being offered
- the “untested” nature of the products
- the insurance/guaranty element of the products
Of the three, I suspect that the third, the insurance element, is the greatest factor. For the past 40 years, plan sponsors and their advisors have largely been focused on developing analytical expertise among products that are “securities”. (i.e., equities and fixed income, mutual funds and alternative investments) For the most part, insurance products have not been part of the mix. For many reasons, insurance products were left to “roll overs” outside of the plan and therefore were left to traditional insurance advisors and outside the ambit of the retirement planning arena.
Getting up to speed in this new domain can be daunting. Furthermore, we continue to hear that there is great uncertainty with respect to the perceived fiduciary risk in shifting to lifetime income solutions. The lack of familiarity (expertise) can generate the perception of higher risk, which can lead to inertia.
Insurance expertise, however, can’t be cultivated in a quick pivot!
I know from experience. We have done a deep dive over the past couple of years into the lifetime income products that have come to market and have developed a dynamic database, identifying over 30 products and upwards of 50 factors or features of products which need to be evaluated. Note too, each week we seem to hear about new products and expand the database. The sheer breadth of product offerings precludes the quick pivot.
Given the needs of the market, we believe that both plan sponsors and their advisors would benefit from creative thinking around structuring relationships that would help facilitate the adoption of these new products. Of course, plans and advisors can build the product competency internally. However, given the complexities and the particularity around guarantees and annuity contracts, this could take a long time; a time longer than the market might allow.
Instead, we’d suggest that advisers might partner with fiduciary experts that can demonstrate competency around the wide range of lifetime income options and the details on executing a fiduciary decision to adopt them. This model is analogous to the relationship employed between investment managers and sub-advisors.
In this model, the plan advisors would maintain the primary relationships with their clients while product experts would focus on the evaluation, selection (in a fiduciary capacity) and monitoring of retirement income options. On an ongoing basis, the plan advisors would continue to maintain their relationships with their clients while leveraging the support of the expert for providing necessary reports and responding to specific client questions. The plan sponsor ultimately could rely on the combined fiduciary processes of the advisor and the sub-advisor.
The creative use of an advisor/sub-advisor model could supplement the plan advisor’s existing skill sets and brands, while enabling them to offer a new area of expertise to their clients in a manner that enhances their on-going client relationships. This new model could provide an efficient response to plan participants pressing needs and a new dizzying array of products hitting the market.
This is one alternative. There easily could be other creative options that could arise out of collaborative brainstorming between retirement plan advisors and lifetime income product specialists. The market energy and the immediacy of meeting plan participant’s needs, provides opportunities for creative problem solving.
We welcome these opportunities.
If you would like to speak with us about lifetime income options for retirement plans, please feel free to reach out. We would love to hear from you!