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Outlook 2010: Income Solutions at the Center of Retirement Plans

This is part of a special advertising section on the challenges facing HR executives in the coming year.

Friday, October 2, 2009
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Human resource executives are all too familiar with the toll the recent economic downturn has taken on employees, many of whom are calling with questions, protests and the occasional demand to learn how they can bolster their 401(k) balances.

Given the market retraction in 2008, many participants in defined-contribution plans are looking to defer retirement or radically scale back their expectations. Fewer are taking concrete action like increasing their savings rates or revisiting their investment choices. Almost none are considering the most important solution: retirement income.

One action HR executives overseeing DC plans can take is offering plan participants a retirement-income investment option now to protect their retirement later. One lesson from 2008 to be heeded in 2010 is that DC plans need to continue along the trajectory of becoming a retirement solution that can actually pay for retirement.

At the end of 2008, only 4 percent of DC plans had an income solution within the plan, but 27 percent planned to add one in 2009, according to Hewitt Associates. We expect that number to jump in 2010, as more baby boomers prepare to retire. Income solutions are clearly "what's ahead" for DC plans.

As architects of DC plans, incorporating guaranteed income into your plan doesn't have to require a complete overhaul. In fact, the inclusion of income is similar to other plan improvements, like adding a target-date fund as your qualified default-investment alternative.

In fact, some income solutions, such as an income-accumulation fund, share similarities with target-date funds. Where a target-date investment strategy uses a mix of equities and bonds, an income-accumulation fund is constructed with a mix of equities and annuities. In essence, this style of income solution marries all the great things about a traditional target-date fund -- ease of use, diversified asset allocation, auto-rebalancing and institutional quality -- with the ability to provide secure income for life. Imagine your participants knowing over the course of their savings years that they are securing a monthly paycheck for all of their retirement years!

Does it really matter? Should retirement-income solutions be a priority for you? Yes, and yes -- for a host of reasons. First, think about those near-retirees in 2008 who suddenly faced severe uncertainty in retirement. With the wave of baby boomers nearing the retirement shore, allowing participants to secure lifetime income can hedge against the scary scenario that they might outlive their DC savings.

For plan sponsors, there is consideration of cost, implementation and ease of communication. Pooled annuities, such as those found in an income-accumulation fund, significantly reduce the cost of annuitization for you and your participants.

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Secondly, implementation and communication is simplified if the income solution meets the Pension Protection Act's QDIA requirements.

The power of income-accumulation funds is that they take away the guesswork and make funding retirement easier and more predictable. Income solutions can provide the floor upon which, along with Social Security income and savings from investment accounts, retirees can gain -- or regain -- their financial footing for retirement. Giving employees access to income satisfies their clear need for revenue exactly when income is needed: when working years (paycheck earning years) are over.

In short, income solutions are a win-win for sponsors and participants. What's more, they guard against the human tendency to procrastinate and delay planning. Research shows most of us are not very good at estimating our life span or how much income we will need in retirement. If you don't have a good idea about how long you're going to live, how can you accurately plan for retirement?

For DC plans, 2010 needs to be the year they evolve. An overwhelming majority of participants now view guaranteed income as a critical plan feature -- ranking lifetime-income options as high in importance as healthcare coverage, according to Barclays Global Investors.

As a human resource executive, you can advocate for this evolution, satisfy your employees' retirement needs and feel confident you are doing your best to set them up for retirement success.

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