That retirement account balances fluctuate with stock markets should surprise no one. But when unusual volatility in markets, of the kind experienced several days in August, sparks unusual trading volume in 401(k) accounts, the correlation becomes noteworthy.
When my wife and I had our first child, I remember studying the classic pre-birth prep book, “What to Expect When You’re Expecting.” Once our son was actually born, it wasn’t like “the good old days” when you could take your time with your brand new baby; instead, the hospital staff handed us our child and told us to go home! At that moment, I could not believe they were actually handing me something so precious and valuable, with relatively no experience on my part, and placing me in charge of his safety.
In essence, this is what many organizations are asking of their retirees. Much like the nurse who hands over a baby and says, “Good luck!” most organizations are providing their new retirees with access to their accumulated 401(k) balances and, in effect, wishing them success. Handing retirees a large sum of money with no real instruction, options or knowledge on retirement planning, and then asking them to live out the rest of their lives on an accumulated retirement fund, prompts an important question: is this really where our obligation to our employees should stop when we have the ability to do so much more without substantial cost to the employer?
I recently had the opportunity to speak at the National Association of College and University Business Officers (NACUBO) conference. To set the stage for why better solutions are necessary, I reviewed the following facts based on the evolving age of retirement across the country:
Due to an overall higher standard of living, people are living longer.
The workforce is aging, so productivity (and the markets themselves), may suffer as the average age of retirement increases.
Healthcare costs continue to rise.
1 out of 4 people believe that spending 10% of retirement funds per year is sustainable, when the real number is closer to 4%.*
25% of Americans will run out of retirement funds in less than half the time they need it to last.*
Other than annuity-based products, the marketplace offers very few investment vehicles that can solve for these problems. Unfortunately, annuity products can be confusing and, with an ever-increasing age of retirement, organizations are asking workers to make critical monetary decisions at a stage in life where many are vulnerable or losing cognitive ability. What’s worse is that when options are effectively evaluated, it is often cost-prohibitive for an individual to purchase retail solutions on his or her own. If retirees are to adequately address the risks we are trying to solve for, such as longevity, market, inflation, interest rate, withdrawal and cognitive risk, they will need to leverage the scale, acumen and sponsorship of their employers to provide affordable, best-in-class solutions.
If you are considering offering annuity products in your plan, you should hire an independent and qualified advisor to help you with your regulatory obligations. Engaging in prudent processes, gathering insurance agency ratings and detailed information, understanding the associated cost structure of contracts, making informed decisions and monitoring such decisions should be handled by an experienced professional, not simply handed off to a new retiree as we deliver their new bundle of joy!
*Source: Lifetime Income in Defined Contribution Plans: A Fiduciary Approach, Fred Reish, Bruce Ashton and Joseph Faucher; 2012 Drinker Biddle & Reath LLP.