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More Participants Are Outliving Their Nest Eggs

Posted by GuidedChoice on May 20, 2019 11:11:04 AM
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shutterstock_622354787-Navy4 Ways Plan Sponsors Can Mitigate Longevity Risk

Every plan sponsor wants their participants to retire comfortably. For them to be able to spend their retirement taking long walks on sandy beaches, spoiling grandchildren, or even traveling around the world. 

Of course, participants must save diligently for a retirement this rosy, but it also requires plan sponsors to fulfill their fiduciary responsibility and successfully manage risk.

While plan sponsors are all-too-familiar with compliance risk, investment risk, and even tax risk, an emerging and still growing risk is taking sponsors by surprise. A risk that, if not mitigated, can send an entire plan into a tailspin. 

It’s longevity risk — or the risk that a person will live beyond their expected lifespan and outlive their retirement savings.

Healthier lifestyles, improved diets, and advances in medicine are all leading to longer lives. So, it’s becoming much more likely that participants will live longer than their nest egg is able to support. 

When plan sponsors don’t account for longevity risk, participants are forced to delay retirement, lower their standard of living, and in some cases, return to work.

When participants discover they have to delay retirement, this directly impacts the plan because now its assets must work harder and longer to make up for the shortfall. And, plan sponsors have the added challenge of managing those investments.

On top of that, organizations are hit with additional costs to cover employees who are working longer. Some of those costs can be quite significant and plan sponsors are forced to either cut back or raise additional funds.  

Why Defined Contribution Plans Are Coming up Short

Despite its growing danger to plan health, longevity risk remains unaccounted for in far too many defined contribution plans.

Current plans fail to mitigate longevity risk because:

  1. They lack lifetime guarantees
  2. Default savings rates are too low 
  3. They aren’t properly educating participants. 

Lifetime Guarantees: Many plan sponsors are taking steps to provide investment menus better tailored to the needs of their participants. Unfortunately, they are turning to investments which offer no lifetime guarantees. They are overlooking the very investment options that could provide participants with a guarantee.

Savings Rates: Many defined contribution plans set minimal rates, hoping that will encourage greater savings later. But the truth is these rates just aren’t adequate to sustain a retired participant, especially if that participant lives beyond his expected lifespan.

According to the 2018 TIAA Plan Sponsor Retirement Survey, only 27% of plan sponsors feel their default investment adequately manages longevity risk. That’s only 1 in 4. And, more than half – roughly 55% - of plan sponsors recommend saving for a retirement that lasts at least 20 years.

There’s a clear disparity here. Half of all plan sponsors recognize that participants will spend 20 years or more in retirement. Meaning, they recognize the need to manage longevity risk, yet only 1 in 4 feels their default investment manages that risk adequately.

Education: Plans may be required to provide educational collateral like summary plan descriptions and annual fee and investment notices, but this just isn’t enough. What participants need is specific advice tailored to their needs and expected lifespan.

Leaving longevity risk unaddressed in plans directly impacts plan participants and harms them in a devastating way. Because they lack the necessary tools, living longer than expected forces them to stretch their dollars for each additional year they survive.

The impact is even more noticeable in spending behaviors of participants. Because retirement should be fun and exciting, most participants forget about their budget and spend, spend, spend. They end up spending more than when they were working. This can be disastrous if they haven’t saved enough in the first place. And in later years, when they really need the money, it won’t be there. At that point, there is absolutely nothing they can do to remedy their predicament.

How Plan Sponsors Can Mitigate Longevity Risk

To address longevity risk, plan sponsors should focus on:

  1. Adequacy
  2. Education
  3. Flexibility
  4. Proper Investment Tools 

Adequacy: Participants have been programmed to focus on accumulating adequate savings for retirement. And some of them work very hard to accumulate as much as they can.

Unfortunately, they haven’t been programmed to consider how much they’ll need to draw from retirement assets, or when. In other words, adequate income. They have no idea how to define what’s right for them. Participants need help determining their “adequate income” in retirement.

Education: No two lives or retirements are the same. Participants need ongoing education — before and during retirement — to help them adjust to changing circumstances. They need to understand how the decisions they make today will affect their tomorrow. The more educated participants are, the more they will positively change their behavior for successful plan outcomes.  

Flexibility: Once participants understand the changes they need to make, they need flexibility within regulations and a plan’s framework to actually make them. Otherwise, participants will be stuck on a path that isn’t what’s best for them as they move toward — and through — retirement.

Proper Investment Tools: And finally, participants need to be equipped with the proper investment tools and services to help them plan appropriately and mitigate longevity risk. Because longevity is such an unknown factor, participants need a solution that can build a plan that’s conservative enough to carry the participant to retirement planning success.

And it’s important for plan sponsors to know and understand how their advisory solutions partner is mitigating longevity risk for participants. When plans provide access to this type of advice, they are assisting the participants in a way that keeps them on a positive path.

Finally, plan sponsors need to understand how education and advice are delivered. And just as importantly, they need to determine the extent of that education and decide whether or not it’s truly helping participants.  

Longevity Risk Needs to Be Addressed Fully

It’s important to consider longevity risk and address it fully within the plan. Work with experts who understand this type of risk. Don’t let the plan derail because of added costs and responsibilities. And don’t let the participants’ plans derail because they don’t have the education or tools to guide and support them.

GuidedChoice knows how quickly a participant’s plan can derail; especially when it’s at the point where there’s nothing left for the participant to do. Their unique methodology works to build a plan that will carry a participant to success.

Contact GuidedChoice to learn how you can address longevity risk in your plan. Through personalized advice and customized planning, their solutions are designed to significantly improve retirement readiness.

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Topics: DC drawdown strategies for participants, drawdown strategies 401k

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