When people in the industry talk about how Boomers are the meaning of retirement, the discussion often focuses on things like working longer, staying more active after retiring, starting a second part-time career or just having longer projected life spans that will translate into more years spent in retirement.
But one often overlooked impact Boomers are having is the changing ways in which we think about the money we will have after retirement.
There has been much talk about giving participants of employer-sponsored plans the option of annuitizing part or all of their account savings during their working years. The Department of Labor and the Treasury have been trying to determine how to enhance retirement security for participants in employer-sponsored retirement plans by providing a stream of income after retiring.
The issue has become more crucial, given the broad shift from defined benefit plans that offer lifetime annuities to 401(k) and other defined contribution plans that payout in lump sums. But one could argue that what is also driving this renewed look at annuities, which have received a cautious endorsement from the Obama administration, is the coming retirement of the 76 million Boomers.
The decades that the boomers have spent accumulating wealth have meant big business for the financial services industry. But that phase is coming to an end, and in many ways the industry must now change its business model. Boomers are now concerned with making their money last.
TIAA-CREF, which manages the retirement savings of 3.7 million Americans, filed comments Friday with the Department of Labor endorsing the use of fixed annuities in workplace retirement accounts. Roger Ferguson Jr., the company’s CEO, said in a statement that most retirement accounts today focus on wealth accumulation, but give little thought to retirement income. The remarks came in response to the request for information Regarding Lifetime Income Options for Participants in Retirement Plans, issued jointly by the Department of Labor and the Department of the Treasury.
In its comments, TIAA-CREF said a fixed annuity used by investors during their working years “allows individuals to take advantage of interest rates rising and falling across a number of economic cycles, which can provide a higher, more predictable income stream at retirement” than transferring accumulations into a fixed annuity the point of retirement during a low-interest rate environment.
ING and the SPARK Institute, which represents the interest of a broad-based group of retirement service providers and investment managers, have also come out in support of the use of guaranteed income choices within employer-sponsored retirement plans.
Many supporters of using annuities in 401(k) and other defined contribution plans, including ING and TIAA-CREF, have stipulated that participants should not be required to annuitize their entire retirement accumulation, but should instead be offered choices for generating an income stream.
“There are a lot of risks that retirees have in the accumulation phase and the industry has done a tremendous job in the last 20 years helping them address those risks,” said Kevin Seibert, principal of the InFRE Retirement Resource Center in Barrington, Ill. “But the industry and individuals have not recognized that retirement distribution planning is not the same as retirement accumulation planning. Even those some of those same risks exist, when you’re planning for retirement on the accumulation side the mentality is you’re dealing with unlimited time and resources and when you get into retirement now you’re dealing with limited time and resources.”
Seibert said that as a fee-only advisor he “was taught that annuities are bad” and had always been biased against them. But in recent years, his attitude has changed. He says that a lifetime annuity can extend the life of a retiree’s managed assets.
“It’s important for retirees and pre-retirees to look at how they’re going to find guaranteed income so they don’t run out of money before they run out of breath,” he said.
Seibert’s path toward annuities largely came from a client he lost when he had his own RIA firm. The client said that he was going to retire and wanted advice on what to do with his income. Seibert said that had never been asked that question — after all, the accumulation phase is decades-long — and he said he gave a bad answer. So the client left him for an advisor who had a better hold on income distribution.
“That’s exactly what he should have done because I really didn’t know how to help him in the way he was asking me to,” Seibert said.