Ask an Expert - Retirement Income
Ask A Retirement Income Expert By:
James Mahaney
VP, Institutional Income
Prudential Retirement
200 Wood Avenue South
Iselin, NJ 08830
Phone: (732) 482 8740
Fax: (888) 778-4169
Email: james.mahaney@prudential.com
Web: http://www.prudential.com
James (Jim) Mahaney is a Vice President with the Institutional Income Innovation unit of Prudential Retirement and currently works in the Product Development area. He has been instrumental in developing new products and strategies to assist individuals who are retiring with 401(k) assets to maximize after-tax income and reduce post-retirement risk. Jim has been an active speaker and spokesperson on the integration of retirement savings and Social Security. He is the author of the white paper, “Innovative Strategies to Help Maximize Social Security Benefits,” and ”Rethinking Social Security Claiming in a 401(k) World”, a working research paper delivered at the Pension Research Council’s annual meeting in 2007. Jim’s work has been featured in The Wall Street Journal, Kiplinger’s Retirement Planning Guide, USA Today, Retirement Weekly, and Forbes.
Q: The recent launch of managed payout mutual funds and group variable annuities with optional guaranteed income riders is overwhelming. Can any of these products be offered to a qualified plan on an investment only basis or is the vendor’s retirement plan program required to take advantage of them? Do they impact open architecture? What are the plan and participant level requirements? Are the group variable annuity products less expensive and portable? Must the client annuitize? Could you please explain the options that are available when the participant terminates or the plan discontinues as well as address compensation. The need is there and managing risk makes sense, but I can’t communicate what I don’t understand.
As baby boomers enter their retirement years, new retail products are being introduced to help retirees generate income throughout retirement. The managed account funds introduced by the mutual fund industry are designed to generate payouts for a specific time horizon. To manage longevity risk and ensure that income will be generated throughout the retiree’s life, the insurance industry introduced optional riders to their retail annuities. These riders are available at an additional cost and are often referred to as guaranteed income options or living benefits. DC plans have become the primary source of retirement income and the insurance industry has responded by introducing group retirement income vehicles to plan sponsors. To date, most if not all of the products introduced to plan sponsors are guaranteed retirement income products. A growing number of firms are now offering retirement income options to DC plans. Simply stated, annuitization is defined as conveying a lump sum to an insurance company in exchange for lifetime income payments. Some of the new retirement income options require annuitization when the payments begin while others do not. Portability is a concern among advisors and many of the new products seem to have addressed this issue at both the plan and participant level. Most of the guarantees appear to apply to the vendor’s designated asset allocation offerings. By using these options, participants are redirecting risk (via the guarantee) to an another entity, an insurer more capable of mitigating the risk. These predefined portfolios provide diversification while allowing the insurer to measure, monitor and manage the risks associated with the guarantees. Guarantees are based on the claims paying ability of the insurer. They do not apply to the investment performance or safety of the underlying portfolio in the variable annuity. Some of the new retirement income options may be available on an investment-only basis. The level of integration into recordkeeping systems is likely to differ among both providers and recordkeepers. Advisors should evaluate system capabilities and the quality of the participant experience when considering these options outside a bundled program. Cost is a key benefit of these new products because they are less expensive than similar retail products by a wide margin. This is a very important point because plan participants can’t rollover to a group product. The lower fees also generate larger income and wealth transfer options to the retiring participant. Compensation varies by product manufacturer. As DC plans evolve in a post-PPA environment, assisting plan participants with distribution and retirement income management is only logical. To learn more about these initiatives, specific inquiries should be addressed to the product specialists at the firms that offer these products. A small group of DC plan intermediaries has been formed to address many of your questions. This new group, The Institutional Retirement Income Research Council, will hold its first meeting in March of 2008 and unbiased commentary should follow. |
