PLANADVISER - Spring 2023 - 30

Investment Focus
Advanced Offerings
A look at several examples of recent retirement income innovations
PLAN SPONSORS now have a range of lifetime income
options to offer participants, with variations in each product
or investment type. This should be especially of interest to
sponsors as they increasingly wish to retain retired participants'
assets in the plan. As plan advisers discuss these
options with clients, they need to break down the choices
into various categories and product types, examples of which
are described below.
Managed Payout Funds, Noninsured
The Dimensional Target Date Retirement Income Funds from
Dimensional Fund Advisors in Austin, Texas, consider retirement
in their glidepath design. Funds for younger participants
have a higher equity exposure than do other TDFs in
their vintage. When a participant is 25 years out from retirement,
bond holdings increase, and liability-driven investments
are added several years later.
By retirement, the portfolio mix will have changed significantly.
The 2020 fund, for instance, has a 25% equity exposure,
with the remaining 75% in what Dimensional calls
" income risk management " holdings. For the 2020 vintage,
the risk management holdings include 61% in DFA's InflationProtected
Securities I fund and 14% in the DFA LTIP [LongTerm
Inflation-Protected] Institutional fund. Per the fund's
materials, the allocation shift is " designed to help manage
the effects of risks-like inflation or a market decline-on
income uncertainty as you approach retirement. "
The Legal & General Retirement Income 2040 Fund from
LGIM America, designed for those who retired in 2020, also
uses a portfolio-based approach but with a twist. LGIM
America views the first 20 years as the early and active stage
of retirement, a period of time when participants need their
money the most. Based on that thinking, the fund's 2040 date
is a terminal date at which time the fund will close. Should
the participant elect not to spend down his selected balance
when the 2040 vintage rolls off, remaining monies would be
allocated to the plan's cash flow matched bond fund.
Insurance, Annuity-Based
More product vendors are offering annuities as in-plan retirement
income options. The guaranteed living withdrawal
benefit, or GLWB, approach is attracting the most discussion,
says Spencer Look, Morningstar's associate director of retirement
studies, in Chicago.
Accounts with GLWBs, also referred to as guaranteed
minimum withdrawal benefits, or GMWBs, are similar to
traditional investment accounts in that account balances
vary with portfolio returns during accumulation. However,
the GLWB allows retired participants to withdraw the guaranteed
benefit for life, even if their account balance drops to
zero-the withdrawal amount is based on the account value
or benefit base at retirement, whichever is greater.
For example, assume a participant about to retire had
invested $100,000 in the GLWB portion-the benefit or
income base-of his TDF, but a market decline had reduced
his account value to $80,000. If the withdrawal rate for his
age is 5%, the withdrawal benefit will be $5,000-i.e., $100,00
x 0.05-applying the benefit base, instead of $4,000 applying
the market value, or $80,000 x 0.05. If participants withdraw
more than the initial amount, subsequent guaranteed
payouts will be lower.
GLWBs incur an additional cost to insure the guaranteed
benefit. According to research from the Institutional
Retirement Income Council, the average cost to have the
guaranteed withdrawal benefit is 80 basis points, with a
range from 50 to 100 basis points.
30 planadviser.com | Spring 2023 | Participants
Art by Changyu Zou
http://www.planadviser.com
PLANADVISER - Spring 2023

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