PLANADVISER - January/February 2020 - 41

the average was $357,200. Reconciling those balances with
the average U.S. household income of about $62,000 in 2018,
and the 20-to-30-year span of retirement likely for many
Americans, illustrates the challenges of effective investment
and conservative distribution.
About half the sponsors of large plans want participants
to stay in their plan after retirement, and only 6% say they
want them to leave, says Lorie Latham, senior DC strategist
at T. Rowe Price Group in Baltimore. For plans with assets
below $500 million, though, only 30% want participants to
keep their money in the plan.
There are plenty of good reasons to keep retired
employees invested. From the plan's perspective, a larger
asset base will sustain economies of scale. " For the last
three years, there have been net outflows from DC plans-
that has been masked by the bull market, " says Bob Melia,
executive director of the Institutional Retirement Income
Council, a group of consultants, advisers and providers.
" That will only increase as more Baby Boomers retire. "
Participants have plenty of reasons to stay in as well: lower
fees on investments than they might get in the retail market;
Employee Retirement Income Security Act (ERISA) fiduciary
oversight of their investment options; and products designed
to generate and distribute income in retirement. Accordingly,
sponsors and advisers are interested in learning the possibilities.
" For some of my sponsor clients, having participants
stay in the plan is their No. 1 priority, " says Martin Schmidt,
head of MAS Advisors in Chicago.
Retirement income can be generated and doled out
in many ways-some simple such as systematic payouts
of a set amount or percentage of assets over time from a
target-date fund (TDF) or other asset-allocation strategy.
And others methods are sophisticated such as individually
managed accounts or managed payout strategies that
dynamically adjust to an age-appropriate portfolio based on
changing market conditions.
The most complex involve guarantees from insurance
companies-target-date funds with embedded deferred
annuities or guaranteed minimum withdrawal benefits.
United Technologies Corp., as its default for new employees,
offers a TDF with an integrated lifetime income option.
Another guaranteed contender is
fixed annuities,
where a retiree turns over a block of retirement assets in
exchange for a guaranteed stream of monthly payments for
life. Recent passage of the Setting Every Community Up for
Retirement Enhancement (SECURE) Act will likely promote
the role of guaranteed products, as it provides a safe harbor
for the annuity choices sponsors offer in-plan, given that
the sponsor follows credit-quality guidelines. Moreover,
participants may move annuities to other employers' 401(k)
plans or to individual retirement accounts (IRAs) without
incurring fees and surrender charges.
In the current capital markets, any retirement strategy
faces a Catch-22. Investing in fixed income conservatively,
or even aggressively, earns minimal returns. Equities have
soared in recent years but present significant risks of principal
drawdowns.
To benchmark an annuity option, PLANADVISER reached
out to Kelli Hueler, head of Hueler Companies in Eden
Prairie, Minnesota. Her organization runs Income Solutions,
which describes itself as an " independent, institutional
annuity platform offered to defined contribution plans, " for
the most part as a service outside of the plan. As of late this
past December, institutionally priced annuities promised
monthly payments adding up to about 6.3% annually of the
contract value for a single-life annuity and, for a joint and
survivor annuity, about 10% less in dollar terms. Thus, for
a hypothetical retiree with a 401(k) balance of $500,000, a
single-life contract would have purchased life-long distributions
of about $31,500 per year.
Retirement-specific options that leave participants with
ownership of their assets show similar low returns. The
J.P. Morgan SmartSpending 2050 Fund is programmed to
spend down assets to an expected maturity date of 2050.
As of this past September, fixed income made up about 80%
of the portfolio with the balance in equity. Fundholders
choose their own rates of distribution, but, at the start of
each year, J.P. Morgan Asset Management provides a target
spending rate, which for 2019 came to 5.4%-$27,000 on a
hypothetical $500,000 balance.
Fidelity's Managed Retirement Income fund is also
conservatively invested and is meant for those over 70; at
the end of October, it held 22% in equities, and had earned a
three-year annualized return of 5.0%-i.e., for a hypothetical
annual income of $25,000.
Taking a longer view of the retirement income puzzle,
consultants at Willis Towers Watson teamed up with
researchers at the Georgetown University Center for Retirement
Initiatives, developing 30-year retirement outcomes for
five categories of income-generating options, documented in
their paper " Generating and Protecting Retirement Income
in Defined Contribution Plans. " Results varied widely as to
income available and assets on hand, though a fixed annuity
option provided a constant income. Considering the varying
circumstances of participants, one choice does not dominate.
" There's a lot of thinking about a retirement 'tier' of
several choices for retirement income, " says Dana Hildebrandt,
director of investments in the New York office of
Willis Towers Watson. " Some sponsors will say, 'We're not
implementing this, because no one has asked for it,' " she
says. " But no one asked for target-date funds, and look how
well they've turned out. " -John Keefe
KEY TAKEAWAYS
* Because participants have varying circumstances, no
one form of retirement income works best for all.
* This past December, an institutionally priced singlelife
annuity paid 6.3% of the contract price-e.g.,
about $31,500 a year from a $500,000 401(k) balance;
retirement-specific options that let participants keep
their assets show similar low returns.
Art by Linda Yan
planadviser.com January-February 2020 | 41
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