The goal of defined contribution (DC) plans like 401ks and 403bs is to replace income in retirement – the first hurdle is saving enough money and investing wisely. But the second and equally important task is making sure that the money lasts which is the purpose of retirement income products. Jamie Greenleaf from the advisory firm of Cafaro Greenleaf, a TPSU Adjunct Lecturer and a member of IRIC (Institutional Retirement Income Council), discusses some of the challenges with retirement income products today and how her association is trying to help.
DC plans are for retirement, not savings so accumulating assets is just half the job. People can struggle with how to derive income over a long period of time. Plan sponsors are doing a better job of helping people save through the ideal plan which includes auto enrollment and auto escalation but retirement income products are not prevalent. Why?
These products face two big hurdles:
- Portability – the ability of investors to transfer these accounts from one record keeper to another
- Costs – after the recession, the costs to guarantee income has risen
Jamie notes that when people are able to buy retirement income products in their plan, the costs are more manageable because they get institutional pricing. Just as DC plan participants often get access to institutionally priced mutual funds not available to most individuals, less expensive retirement income products are available within DC plans. But unless there’s a third party involved, it’s hard to transfer these investments from one record keeper to another.
DST, a transfer agent that works with many record keepers and money managers, has set up a “clearing” capability to allow for transfer of retirement income products from one record keeper to another when an employee moves from one plan to another or even when a company switches providers. More and more providers are using the DST utility according to Jamie.
In calm markets, investors get comfortable thinking prices will continue to rise. But volatile markets cause investors to look for safe, predictable returns especially when they near retirement. Ask your advisor about whether retirement income is right for your employees and be sure to cover the cost and portability issues.
DCIIA (Defined Contribution Institutional Investor Association) provides a good insight and case studies into retirement income.
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