Administration November 5, 2020

Offering the Benefit of Guaranteed Income in DC Plans

Lifetime income projections, offering more control over assets and education about annuity pricing will help participants be more receptive to in-plan annuities.

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The SPARK [Society of Professional Asset Managers and Recordkeepers] Institute led a discussion on the potential rise in in-plan annuity products following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

The panel explored how professionals are addressing guaranteed lifetime income product adoption in defined contribution (DC) plans, integration, scalability and customer experience with participants who may be reluctant about in-plan annuity options. Doug McIntosh, vice president of investments at Prudential Retirement, said the SECURE Act’s provision to remove the 59.5 age barrier for service withdrawals is a relief to sponsors and participants alike.

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McIntosh said Prudential noted that most participants valued control over their assets, especially during the COVID-19 pandemic when access to emergency savings is critical. “We came to market with a vehicle that offers a living benefit; participants still have control of underlying assets but derive lifetime income for participants and spouses,” he said. 

Sherrie Grabot, founder and chief executive officer at GuidedChoice, said participants are more likely to show interest in in-plan options if they see potential income projections. When such projections are offered, Grabot said she has noticed a change in behavior among participants, including when GuidedChoice rolled out a product in 2011 that allowed participants to see their projected retirement income numbers. “You have to show the income coming out of the defined contribution [DC] plans,” she encouraged. “It increases savings rates when they see that income level.”

On the subject of retirement income, Mike Westhoven, product leader at Micruity, explained the cost of retirement and misperceptions when it comes to annuity fees. An affordable retirement has become synonymous with annuity fees, he said, and annuities have long been regarded as pricey. However, Westhoven said, if a participant refuses an annuity, the future retiree will end up needing to save thousands more to afford the same retirement as one with an annuity. He encourages employers and advisers to ensure their participants and clients understand the misperception. Those who refuse an in-plan annuity option could potentially benefit from one.

Investing November 5, 2020

Best of PSNC 2020: Figuring Out Fixed Income

Defined contribution plan sponsors can offer meaningful fixed income investment options by using diversification and thoughtful asset managers.

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Tracey M. Manzi, vice president, investment services at Cammack Retirement Group, explained to attendees of the 2020 Best of PSNC (PLANSPONSOR National Conference) that interest rates are driven by the state of the economy, employment levels and inflation. “In a strong growth environment with lower unemployment, wage pressures lead to rising inflation, so the Fed increases interest rates to combat inflation because it doesn’t want to choke off growth,” she said. “When there are job losses and economic loss, the Fed lowers rates to encourage spending.”

Tripp Braillard, senior vice president, defined contribution (DC) solutions at Heitman, a real estate investment management firm, said that, from a return standpoint, low rates are supportive of real estate investments. Low rates are also a positive for investing in debt. “For real estate, three-fourths of the investment will generate income, while on the debt side, 100% is income,” he said.

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Braillard added that inflation is bad for bonds, but for real estate, it offers more pricing power to improve returns for both debt and equity investments.

The top risks of fixed income investing are interest rate risk as well as credit risk (i.e., when a debtor can’t pay off its debt), Braillard said. “Rate risk is something plan sponsors want to look at because it also informs the duration of the investment they want to choose; shorter duration strategies have less interest rate risk,” he said.

According to Braillard, fixed income managers have many opportunities to create alpha and also to mitigate risk. “There are so many types of bond funds available to DC plans,” he noted. “Different sectors, short term and long term; the best managers can take advantage of multisector strategies.”

He said Heitman thinks that in the fixed income market, it pays for plan sponsors to go with active investing for efficiencies, since there are so many products and so many risks.

Manzi said fixed income is much more complicated than equities, but she agreed that there are levers managers can pull to produce good outcomes.

Fixed income investments take on more importance for participants at or right before retirement, Braillard said. He recalled the traditional 4% retirement withdrawal rule, and said there is no way to get to 4% or 5% today unless investors do something different. “There’s a gap they need to make up. They can do that with high-yield bonds, but then they are taking on equity beta risk,” he said. “There’s no one single solution for fixed income. You can get yield, but you have to take on risk to do so.”

Braillard cited an Employee Benefit Research Institute (EBRI) study on people in retirement that found the vast majority wanted to only live off income and not touch their principal to make sure their money lasts throughout retirement. He said that would be difficult for retirees now. “We think annuities have a role to play to mitigate longevity risk,” Braillard added.

He suggested plan sponsors make sure fixed income managers are using all the tools available to them, or that consultants are putting together fixed income or retirement income solutions with managers that use all the tools they have. “There are innovative ways to deliver 4% to 5%. Advisers can help by putting together solutions created by thoughtful managers,” Braillard said.

“With DC plans, sponsors tend to focus on equity, but there’s a lot going on with bonds, so sponsors need a lot of education,” Manzi said. However, she noted that, recently, fixed income has dominated conversations with plan sponsors and committees when it comes to underlying investments in vehicles plan sponsors offer. “Different TDF [target-date fund] providers have different perspectives on how fixed income should fall along the glide path. Particularly at retirement age, equities can range from 30% 60% or more,” she said.

Manzi pointed out that managers that are more conservative, such as Vanguard, have high quality hedged fixed income vehicles in their TDFs. Other managers that look longer term have a more diversified fixed income portfolio stretching for yield. These managers use a range of sectors, long- and short-duration, and domestic and other currency. Manzi said plan sponsors need to “peel back the onion” when looking at providers’ strategies.

On DC plan investment menus, Manzi suggested plan sponsors diversify yield and add Treasury inflated-protected securities (TIPS) to hedge inflation. “Offer different options for participants to use to face these challenges,” she said.

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