For decades, retirement plan sponsors have made progress helping workers save for a period in life when they are no longer employees. But retirees can use more assistance managing how they spend their nest eggs, an opportunity wealth managers should consider.
Americans are largely unprepared for retirement. A quarter of them have no retirement savings and barely one third saving feel they are on track to meet their goals, according to a PwC report published in March. The tax and consulting firm estimates the median retirement savings account of $120,000 for those approaching retirement (age 55 to 64) will provide less than $1,000 per month over a 15-year span, a payout that will be “hardly enough.”
But the process of saving for retirement is only one challenge Americans face. While almost all plan sponsors (89%) provide tools and advice on how to meet retirement readiness goals, many don’t provide similar resources to help savers spend that money.
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Although 66% of plan sponsors said they communicate account balances to participants in terms of projected retirement income, only 49% allow participants to take systematic withdrawals. Just 35% set retirement readiness objectives for participants and measure results, according to a recent survey by PGIM, Prudential Financial’s $1.5 trillion asset management business, and the benchmarking and analytics firm Greenwich Associates.
The survey included 138 defined contribution plan sponsors with at least one 401(k) plan and at least $100 million in 401(k) assets.
“The passage of the 2019 SECURE Act had positive implications for plan sponsors and their participants as it relates to retirement income. But our research indicates that we must continue to evolve these offerings, particularly with the help of technology, to ultimately meet the decumulation needs of American workers,” Josh Cohen, head of institutional defined contribution at PGIM, said in a statement about the survey.
Most plan sponsors offer an income solution of some kind, such as long-duration fixed income funds, managed accounts, in-plan and out-of-plan annuity products, or managed payout funds. However, 23% of plan sponsors said none of those are part of their investment menu.
“Plan sponsors need to evolve their defined contribution plans to focus not only on retirement savings, but also achieving adequate retirement outcomes. By embracing new technologies, robust income communications, customization opportunities, and risk mitigation solutions with both non-guaranteed and guaranteed investments, [defined contribution] plans have the potential to help workers meet their retirement income challenges,” Cohen said.
Winds of change are blowing in the defined contribution space. Last summer, the Department of Labor effectively gave its blessing for plan sponsor advisors to offer private equity vehicles in retirement accounts. The retirement plan advisory industry is also evolving; even some of the largest companies are consolidating. More retirement income solutions might be on the way, too, according to PGIM.
In the meantime, the enormous need for advice on retirement coffers could be met by financial advisors.
Research shows only about 5% of employees meet all “financial wellness” criteria and many are interested in professional advice or planning, and how to thoughtfully spend their retirement money.
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.