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Maximizing Drawdown

New programs that offer payout or drawdown options for retirement savings are complex to research and explain to defined-contribution-plan participants. But many of those participants are asking for guidance and help in stretching out their savings through their post-employment lives.

Sunday, October 2, 2011
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With a volatile stock market and an uncertain economy, those halcyon days when employees retired with a gold watch and a pension never seemed so far away.

And even though those days never really existed in reality -- fewer than 25 percent of private-sector retirees received pension checks back in the day -- the dream of a steady post-employment income persists.

It was the desire to provide that future for workers at Mannington Mills that led Mike Hopp, the company's vice president of HR, to explore some of the newer products on the market today that offer guaranteed-lifetime-income-payout options.

Hopp says his Salem, N.J.-based company, which manufactures residential and commercial flooring, froze its pension plan in 2007 -- and he was deluged afterward with questions from workers: " 'How do we take our money out? How do we ensure we have enough money to retire on?'

"They look at our HR department and say, 'You have got to help us make good decisions.' They look at us for advice and help, and we try to give them something ... ," Hopp says.

What Hopp gave them was access, within their defined-contribution plans, to a Prudential product called IncomeFlex Target, which, he says, "acts like a pension plan."

"To me, this has all of the positives of an annuity and all of the positives of a pension plan -- and very little downside," he says.

Participants choose an appropriate target-date fund based on their retirement time frame, and their income guarantee is activated 10 years prior to retirement, but no earlier than age 55, according to Prudential.

A participant receives a steady income -- an income that is guaranteed to never be less than the total contributions (employee and matched) that were made to the plan, regardless of the actual market value should the stock market drop. At the same time, it allows the plan funds to stay invested after retirement so a participant will see gains if the market rises.

"The whole time you are drawing off [funds], it's still earning money. That's the reason why you might have a nice bucket of money at the end [of life]," Hopp says.

"I am very committed to this [hybrid-annuity concept], whether it be the Prudential product or a similar product," he says. "It helps the blue-collar person, particularly, who is not sophisticated in investments ... to take this money and make it work for you. This takes a lot of stress off of [retiring employees]."

And yet, Mannington Mills -- which has between 1,800 and 2,000 employees in seven locations, depending on its business cycle -- is one of the few companies providing such retirement-plan options to employees, even though there are many different vendors offering various retirement-payout options.

Vanguard and Fidelity both offer managed-payout funds that are designed to provide inflation protection and capital appreciation over the long term, while making monthly distributions. Financial Engines offers an Income+ program to manage retirement funds as part of a systematic withdrawal plan.

In addition to Prudential, other insurance companies offering guaranteed-lifetime-income options, known as GLIOs, are Diversified SecurePath, Great-West SecureFoundation, John Hancock Guaranteed Income for Life, Mutual of Omaha, MetLife and The Hartford Lifetime Income, according to the Institutional Retirement Income Council, a nonprofit think tank in Iselin, N.J.

GLIOs are different than annuities in that they offer more flexibility in accessing savings and provide added protection in the accumulation phase, according to the IRIC. At the same time, GLIOs are different than mutual-fund-payout products in that they offer guaranteed values.

According to a March 2010 survey by the Chicago-based Profit Sharing/401k Council of America, roughly nine of 10 (91 percent) plan sponsors are aware of guaranteed-retirement-income products, but only 6 percent currently offer them. Another 4 percent have decided to add such an option to their plans and 22 percent are considering whether to add such an option.

Other studies, such as one by Mercer, shows 25 percent of plan sponsors offer a fixed-payout option to participants, while another by Aon Hewitt puts the number at 15 percent.

Part of the reason defined-contribution-plan sponsors are not rushing to offer access to payout or drawdown options is fear: They fear the potential liability should things go wrong; they fear the government will find they didn't fulfill their fiduciary responsibilities because of the offering; and they fear any provider they select might go belly-up 20 years down the road.

In addition, such plans are complex and would require extensive educational efforts for participants -- as well as for the plan sponsors who have to research and select offerings in a fairly new field.

Live Long without Prospering

"I think the financial crisis put a big dent in people's willingness to offer these kinds of products," says Alan Vorchheimer, a principal at Buck Consultants in New York, noting that, if the federal government offered some information "clarifying any fiduciary risk, ... that might be helpful."

The concern, he says, is that plan participants will sign up for an annuity or drawdown program of some type and if "people can't get their money out, then they are going to come back after [the company]."

At the same time, many plan participants don't know how to go about converting savings into a life-long stream of income and many may end up facing 20 or 30 years of retirement with too few funds to comfortably survive.

More than half (51 percent) of U.S. households are "at risk" of seeing a big decline in their living standards when they retire, according to the National Retirement Risk Index from the Center for Retirement Research at Boston College in Chestnut Hill, Mass.

The typical 401(k) participant has about $78,000 in his or her account, which equates to about $3,200 a year for that retiree based on the standard 4-percent drawdown each year, said the Center's director, Alicia Munnel, during a recent webinar. That's assuming the funds are not earning interest during the drawdown period.

"I think people are going to be shocked when they get to retirement and see how little money they have and how little that provides as a source of monthly income," she said. "It's expensive to support yourself for 20 years without working."

Christine Marcks, president of Hartford, Conn.-based Prudential Retirement, says the typical balance is far higher -- $160,000 -- yet even that will only provide an income of $12,000 a year.

"The point," says Betsy Dill, a Los Angeles-based senior partner at consulting organization Mercer, "is, whether it's $78,000 or $160,000, it's not a lot."

It is for that reason that many organizations have been focusing on the accumulation phase of retirement planning. More than half (56 percent) of the employers polled by Chicago-based Aon Hewitt automatically enroll participants in their defined-contribution plans and nearly that many (51 percent) have an automatic contribution escalation in their plan.

But, regardless of the amount of money they have saved, nearly all plan participants (90 percent) want more guidance on how to make sure their funds last through retirement -- and 57 percent say their plan sponsors have not been helpful in that regard, according to the Annual Defined Contribution Plan Survey by BlackRock, a New York-based provider of investment, advisory and risk-management solutions.

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According to BlackRock's survey, in partnership with Boston Research Group, 93 percent of participants have expressed interest in receiving a stream of retirement income along with -- or instead of -- a lump sum. But, only 23 percent of plans offer such an option.

"People want to know what they should do," says Kelli Send, senior vice president of client services and principal at Francis Investment Counsel in Milwaukee, "and they are scared to death of the financial-services industry because they don't know who to trust ... and employers oftentimes say, 'Bye,' and that's unfortunate."

Regulations to Come?

"I think the No. 1 thing employers have to consider [in offering a retirement-payout plan]," says Jack VanDerhei, research director at the nonpartisan Washington-based Employee Benefit Research Institute, "is the potential fiduciary exposure ... [of] a contractual obligation for your employee, with an entity, that may actually go decades into the future. It's very difficult, obviously, to predict the claims-paying ability of a financial entity that far into the future.

"I think until something is done to provide for ... that fiduciary-liability exposure to be somewhat mitigated, I think a lot of employers just don't think they can get involved in something yet," VanDerhei says.

This year, the U.S. Departments of Labor and the Treasury issued a joint request for information about regulations they should consider that would enhance the retirement security of workers in employer-sponsored retirement plans.

VanDerhei says the DOL and Treasury received hundreds of submissions, many of which were from plan sponsors concerned about fiduciary liability.

Ben Yahr, a Philadelphia-based executive with Ernst & Young and an adviser to the IRIC, says many plan sponsors "have done research on [payout and drawdown options], but most companies don't want to be the first company to make that move. They want somebody else to blaze that trail and navigate through that system."

Adoption of such plans may not remain slow, however, says Mendel Melzer, an IRIC member and chief investment officer for The Newport Group in Heathrow, Fla., comparing such programs to the now-popular target-date funds.

"Just a few years ago, target-date funds were new and untested, and plan sponsors and consultants needed to develop a framework for evaluating them ... . The same creativity must now be applied to retirement-income products for them to become a successful component of a plan sponsor's overall retirement-plan strategy," he says.

Yahr says adding a payout or drawdown program will entail an extensive education and communications effort by HR leaders. "The benefits are really complex and trying to turn around and explain that in a way that your participants are going to understand what they are selecting ... is a real challenge," he says.

Mannington Mills' Hopp says his education efforts began with his board of directors and management committee -- and the issue was an involved one, even for them, "because it was so complicated -- the way [retirement-income options] work behind the scenes."

That's because, he says, there are two different balances for guaranteed funds -- one is the market value, which might drop in reality, while the other value -- the artificial value -- stays at the high-water mark of the "income-base" value.

To prepare for his company's launch of the product, he held about a half-dozen employee focus groups to get a sense of their interest level, questions and concerns, and then worked with Prudential to redesign the information packets to simplify the explanations.

The company also offered education via webcasts, online forums, on the phone and in person.

"I think you have to design your training platform around multiple audiences and make sure you hit every part ... ," Hopp says. "We needed to get more creative on how to help our people, and this was one way ... to do that."

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