How we can help Americans achieve a secure retirement
Earlier this year, the U.S. Department of Labor and the Department of the Treasury issued a formal “request for information” regarding ways to enhance the retirement security of American workers by integrating lifetime-income solutions into employer-sponsored retirement programs.
By Mark Foley, a vice president in Prudential Retirement (published in Fund Action August 16, 2010)
We believe that by soliciting a wide range of perspectives—including those of the industry groups and retirement-plan providers actually on the front lines of this issue—the Agencies will be well-informed, and should be supported and applauded as they seek to develop meaningful recommendations that can make a real difference in people’s lives.
In fact, a discussion about lifetime-income solutions is long overdue. The shift from defined benefit pension plans, and the steady retirement paycheck they provide, to 401(k)s and other defined contribution programs has left a majority of Americans woefully unprepared for their retirement years.
Yes, the Pension Protection Act of 2006 (PPA) has had a positive impact on a number of the retirement-planning “accumulation risks” in the do-it-yourself, defined contribution world, most notably the risks that individuals aren’t participating in their defined contribution program, saving enough, or diversifying assets appropriately.
But the corresponding “distribution risks”—such as protecting savings from market volatility, converting savings into guaranteed income, and ensuring that participants do not outlive their nest eggs—remain largely unaddressed.
With the RFI, the Agencies have recognized they have a fundamental role to play in promoting the awareness and acceptance of guaranteed lifetime-income solutions in employer-sponsored retirement plans. And we believe the following steps are critical if we are to see greater adoption of in-plan options that deliver a “retirement paycheck” that cannot be outlived.
Clarify and simplify existing regulations
The Agencies should issue regulatory clarifications, guidance and simplifications to remove obstacles that currently discourage plan sponsors from offering guaranteed lifetime-income solutions within their plans. For example, the Agencies could simplify existing standards for the selection of product providers and could confirm the applicability of QDIA protection for in-plan investment options that include a guaranteed lifetime-income solution.
Offer a wide range of lifetime-income solutions
A “one size fits all” approach will not work for retirement income. Some retirees want to maintain control of their retirement savings, while others are willing to give up control in return for a larger guaranteed “paycheck.” We believe that it is important to provide sponsors and participants with significant latitude to choose the income solution that best meets individual circumstances and needs, and to not favor one type of solution over another.
Authorize the use of GMWB offerings as distribution options
The Agencies should authorize the use Guaranteed Minimum Withdrawal Benefit (GMWB) products as income-distribution options because they not only provide guaranteed lifetime income, they also ensure that participants retain control of their assets. Currently, many participants avoid in-plan “annuitization” options because they must sacrifice control of their savings.
Step up educational efforts
The Agencies should take action to educate plans sponsors and participants about retirement security—and, specifically, the need for guaranteed lifetime income—through official Agency publications, websites, webcasts, media campaigns and seminars.
The Agencies should support industry efforts to standardize the administration of guaranteed lifetime-income solutions so that they’re easily portable from one plan to another, or from an in-plan option to a retail option.
By taking these steps—by building on the solid momentum generated by the PPA—the Agencies can improve the retirement security of American workers and can help transform the perception and role of defined contribution programs by encouraging participants to focus less on the balance being accumulated and more on what’s really important: the retirement income their plans will generate.
While the rebound in financial markets has brightened the retirement prospects for many, the vast majority of individuals still bear the risk of running out of money in retirement without the protection afforded by an income stream that can’t be outlived, regardless of what is going on in the markets. That’s why it’s so important to take action now to ensure that Americans’ golden years are indeed golden and worry free.