98% of employees want a guaranteed, sustainable income stream in retirement, beyond Social Security*,

* Wells Fargo Asset Management. Wells Fargo/Gallup Investor and Retirement Optimism Index. 2018.

yet that’s what many DC plans currently lack.

It’s time for the retirement planning conversation to evolve.

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The need for a sound strategy

In recent years, plan sponsors have made progress with encouraging good saving and investing behaviors during the asset accumulation years.

However, the decumulation phase shows less progress. The result?
Employees are at risk of outliving their retirement savings.

In the accumulation phase

Significantly improved:

  • Start early (and not stopping)

Improving:

  • Save at a high-enough rate
  • Diversify your investments

Continued challenge:

  • Don’t cash out

In the decumulation phase (retirement)

Continued challenges:

  • Generating income
  • Ensuring that assets are not outlived

Source: Wells Fargo Asset Management—for illustrative purposes only

 

Our mission is to be part of the retirement income solution that helps employees achieve the retirement they deserve—to better manage the journey of building up and spending down retirement income.

Today, nearly two-thirds of 401(k) plan assets are now held by employees ages 50 or older,1 but too few plans offer solutions for managing retirement income. In fact, employees are still largely on their own when it comes to making some of the most important retirement planning choices:

  • When is the right age to retire?
  • How much savings are needed for sufficient income in retirement?
  • What’s the best way to compare retirement income products?

A comprehensive solution helps employees through all stages of retirement with a mix of investment strategies, tools, and education.

The goal: To guide employees through the retirement decision process in a straightforward and individualized way.

1. EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, 2015.

Most DC plan participants want a guaranteed,
sustainable income stream in retirement beyond Social Security.2

Half of plan sponsors provide no retirement income solutions in their plans.3

2. Wells Fargo Asset Management. Wells Fargo/Gallup Investor and Retirement Optimism Index. 2018.
3. Callan Associates, 2019 Defined Contribution Trends, 2019.

Benefits to plan sponsors

Without a comprehensive solution, retirement planning decisions can lead to anxiety, inertia, and disastrous financial outcomes. Excluding a retirement income solution may also undermine the plan sponsor’s ability to strategically manage their workforce.
Benefits include:

retirement planning

 

Improved recruiting and retention

A thorough retirement approach to benefits can help attract and retain talent when current and prospective employees consider the total package.

Higher productivity

Financial wellness studies4 suggest that retirement solutions ease concern for employees, contributing to workforce productivity and loyalty.

Healthy turnover

Plan sponsors can influence the timing of retirement through well-designed plans that increase employees’ confidence in their ability to retire on time. This could improve the firm’s productivity and lower overall costs.

4. Towers Watson. Which Workers are Delaying Retirement and Why? September 2014.

Risks to be balanced

Employees face certain risks that may jeopardize their long-term financial well-being. A truly comprehensive retirement income solution addresses these five risks.

1. Longevity risk

The risk of outliving one’s savings continues to rise along with life expectancies and health care costs. This directly affects retirement savings goals and expected income needs. As shown here, while the average 60-year-old male will live to age 84, some live past 100. This broad dispersion of longevity makes it very difficult to predict the level of savings needed for retirement.

Broad dispersion of life spans underlies the importance of longevity risk

Average survival and life span probabilities for a healthy male having attained 60

Source: Society of Actuaries, RP-2014 Mortality Tables

2. Equity market risk

Market downturns are inevitable and unpredictable. A downturn close to or during retirement can be especially damaging, with little time to recoup losses. This is a key concept of target date funds, which gradually lower exposure to riskier assets over time.

3. Interest rate and inflation risk

We are now coming out of an ultra-low interest rate environment. There could be a real danger in underestimating changes in inflation and interest rates and how these might affect the growth of assets and income in retirement.

4. Liquidity risk

Liquidity refers to the ability to quickly access funds without incurring a loss. Unexpected events—such as a health emergency—may create real hardship without sufficient liquid assets. Liquidity is often low in thinly traded assets (real estate, for example); guaranteed income products and insurance strategies are often entirely illiquid.

5. Cognitive and behavioral decision-making risk

Human beings are fallible. We are all subject to a wide range of cognitive biases that can lead to suboptimal decisions, and we’re naturally susceptible to cognitive decline as we age.

Solutions for employees

Employees have different needs, depending on their financial, health, and family situations—that’s why no single solution will fit all plans. That includes the two main types of retirement income strategies: Guaranteed income strategies and nonguaranteed income strategies.

Guaranteed income strategies

These strategies are intended to provide stable income for a set period of time or for life, and may protect retirees from investment risks, longevity risk, and decision-making risk. They include immediate and deferred income annuities, and the guaranteed minimum withdrawal benefit available with some variable annuities. The goal is to provide stable income for a set period of time or for life.*

* Annuity guarantees are subject to the claims-paying ability of the issuing insurance company.

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Single premium immediate annuity (SPIA)

Monthly payments begin immediately after purchase and continue for a fixed period or for the annuitant’s lifetime. This may include a periodic cost-of-living adjustment.

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Qualified longevity annuity contract (QLAC)

This type of deferred income annuity is funded with assets from a qualified retirement plan (or an IRA) and provides an income guarantee for life.

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Guaranteed minimum withdrawal benefit (GMWB)

This optional rider is available on certain annuity contracts and guarantees a minimum periodic payment, with protection against downside market risk.

Annuities are not offered by any Wells Fargo Asset Management entity. These products are offered by third-party companies, which are not affiliated with Wells Fargo Asset Management entities.

Guaranteed income products are gaining interest and becoming more established. The Department of Labor now recognizes the QLAC as a qualified default investment alternative and has issued guidelines on using independent fiduciaries to help select these products. Download the full report to compare the risk trade-offs for guaranteed and nonguaranteed income strategies.


Nonguaranteed income strategies

These strategies include diversified portfolios of investments and may provide regular—but not guaranteed—sources of income. Retirees can choose stocks and other risk-based investments in the hope of growing assets, but they are exposed to investment risks, longevity risk, and decision-making risk.

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Diversified investment portfolios with a systematic withdrawal program

Distributions may be set up as fixed dollars or percentage payouts or payouts to mirror the IRS-required minimum distributions. With this strategy, market risk and longevity risk remain with the retiree.

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Managed payout funds

Managed payout funds are actively managed to distribute assets. Defined-period funds pay distributions based on a fixed time frame, but the distribution amounts vary based on the account value. Payout funds offer predictable payments, but there is no income guarantee.*

* Managed payout funds are not offered by any Wells Fargo Asset Management entity. These products are offered by third-party companies, which are not affiliated with Wells Fargo Asset Management entities.

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Lump-sum distributions

Taking full distribution at retirement—in cash or as an IRA rollover—leads to great uncertainty. Transferring some or all assets in kind can keep the funds invested and avoid the tax impact. But unlike other options, there is no assurance that the portfolio will generate the amount of income retirees need.

Plan design for better outcomes

A comprehensive solution combines a variety of components that target specific needs at different stages of retirement. That might include guaranteed and nonguaranteed income strategies, systematic drawdown programs, educational programs, and practical tools like income calculators.

Three guiding principles can help sponsors develop a successful retirement income solution.

1

Simple

Plans should be simple for employees to use and for plan sponsors to administer. For employees, that means a seamless transition from saving and investing during working years to income generation in retirement. For plan sponsors, the solution should have institutional pricing.

2

Flexible

Plans should allow employees to change allocations or opt out. Employees value the ability to adapt their income strategy to meet changing needs. Plan sponsors should also be able to make adjustments that reflect organizational changes.

3

Effective

Plans should successfully deliver on the main income goals and hedge against longevity risk. The solution should aim to maximize assets spent in retirement (at the employee’s risk tolerance), with liquidity to cover emergencies.

 

Together with plan sponsors, we can help employees pursue long-term financial well-being through their retirement years.

Read our full report on retirement income for more detailed information, including checklists to help plan sponsors review plans, determine strategies, and help employees.

Investment and Insurance Products: NOT FDIC InsuredNO Bank GuaranteeMAY Lose Value