Retirement Income Products Fall Short

The recent economic crisis drove an average loss of 30.5%1 in 401(k) account balances and an unprecedented shift in pre-retirees' investment goals. According to Fidelity, 85% of Americans aged 55-70 now value guaranteed monthly income more than above-average returns.

In response to the need of pre-retirees for products that guarantee income and the impending retirement of the baby boom generation, retirement plan providers have continued to invest in income-oriented product innovation.

In fact, despite severe budget cuts, a quarter of the retirement services executives in Corporate Executive Boards' Retirement Services Roundtable increased their investment in retirement income initiatives in the second quarter of 2009. Their aim: simplify and automate retirement income with a holistic, all-in-one product (i.e., a target date fund with an embedded guarantee).

In other words, make the 401(k) plan look and feel more like a defined benefit plan.

Unfortunately, few participants or plan sponsors find these products appealing. The Roundtable attributes this product/need disconnect to the following: The products are too complex—Financial services firms struggle to explain complex investment products to participants, many of whom lack basic financial knowledge. The products are not sufficiently portable—The existing products are not easily transferred as a participant moves from job to job. The products are not trusted—In the current environment, many question whether insurance firms can successfully back these products or whether the products sufficiently mitigate single insurer risk.

Some Roundtable members believe that it will take formal legislation to drive widespread adoption of these in-plan income-guaranteed products. Until then, firms plan to supplement their product innovation investments with education programs to help participants understand how to convert their savings into a predictable paycheck in retirement. Unfortunately, this will also be an uphill battle considering that 43% of individuals believe they can withdraw 10% or more a year from their retirement savings (recommended distribution rate is 4%). At that rate, boomers will be out of money and rejoining the workforce shortly after they retire.

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