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Where is participant awareness? Generally aware that: – 401(k) plans will play a major role in their retirement – Social Security is only a building block – They are principally responsible for their retirement Still working on: – Retirement Readiness – Understanding economic and market risks – Ways to generate a stream of income they will not outlive
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In-Plan Retirement Income Solutions:Offering a Defined Benefit solution in your
401(k) Plan
Moderator: Rick Unser, AIF, QPFC, CRPS, Lockton Investment Advisors, LLC
Panelists:James Lyday, Prudential RetirementSteve Smith, Diversified Investment AdvisorsDerek McDougal, John Hancock Retirement ServicesChip Castille, BlackRock
What are the challenges?
Longevity Risk of Baby Boomers Shift away from traditional pension plans
For over 63% of Americans, their 401(k) will be the only source of income, apart from Social
Security
Inflation Economic and Market Risk
38% of workers over age 62 have had to delay their retirement due to the current recession
A participant who planned to retire in 2008, would have to delay 5 years, assuming 7% investment returns, to get to the 2007 balance.
36% chance that at least one of a couple of healthy 65-year-olds will live to 95
The inflation rate is assumed at 4% per annum. Example is hypothetical and for illustrative purposes only.
Where is participant awareness?
• Generally aware that:– 401(k) plans will play a major role in their retirement– Social Security is only a building block– They are principally responsible for their retirement
• Still working on:– Retirement Readiness– Understanding economic and market risks– Ways to generate a stream of income they will not
outlive
What is a Retirement Income Solution?
Basic Definition:A voluntary option offered within the core
investment line-up of a qualified retirement plan which offers plan participants:– Protection from market losses– Potential to participate in market gains– Guaranteed stream of income at retirement– Institutional pricing
How did these programs evolve?
Individual Annuities
Individual Variable Annuities
In-Plan Retirement Income
Out of Plan vs. In Plan
• Reducing “Sequence of Returns” risk was the innovation
Mr. Smith• Retired with $100,000• Withdraws $5,000 per year• Began drawing income when
markets were falling
Ms. Jones• Retired with $100,000• Withdraws $5,000 per year• Began drawing income when
markets were rising
Hypothetical example for illustrative purposes only.
Case Study Results
Reducing risk in retirement
• When withdrawals are being taken, the order of return matters.
The bad luck of retiring at the wrong time
The good luck of retiring at the right time
What is the response in the market?
• Estimated Assets - $1.4 Billion
• Percentage of new plans adopting? >50%
• Percentage of participants utilizing? 5-10%
What should a plan sponsor consider?
Considerations Questions
Is there a need? Age of workforce, exiting defined benefit plan, etc.
Fees Are they necessary and reasonable?
Market Exposure What is the strategy for participants to experience potential market appreciation?
Financial Ratings Look at claims paying ability and credit ratings
Portability What happens if you change providers?
Questions????
ILLUSTRATIONS AND EXAMPLES
11
What are some key features of the programs?
• Market Value Step Up• Down Side Protection• Guaranteed Minimum Withdrawal Benefit
Market Step Up Example – Declining Market
Hypothetical example for illustrative purposes only.
Market Step Up Example – Rising Market
Hypothetical example for illustrative purposes only.
Guaranteed Minimum Withdrawal Benefit
Even if investment performance and guaranteed withdrawals bring Market Value to $0, checks will continue and never decrease!
Target Date Retirement Income
• Target Date Retirement Income combines two familiar andaccepted concepts:
– Target-Date Funds — ensure automatic and age appropriateasset allocation
– Annuities — Fixed deferred annuities replace traditional fixed income investments, providing participants with a hedge for longevity risk in retirement
• Low-cost, transparent, and institutional collectivetrust fund
• Target Date Retirement Income can be a QDIA, allowing plan sponsors to make income accumulation the default
Time horizonShort Long
Risk %
US Large Cap Equities
Deferred Fixed Income Annuities
Global Real Estate
US Small/Mid Cap Equities
International Equities
Annuity component provides increased access to income as the participant nears retirement
Ret
urn
%
New Concepts for In-plan Retirement Income• Jake, 22 years old, works for XYZ Corp.
– His starting salary is $42,500– His contribution to the Target Date Income fund is 4.0%
• As Jake saves over the years, his Target Date Income fund could look like the following:Monthly income to begin at age 65 from Jake’s pro-rata portion of annuities
Total cash value of the Target Date Income investment (investment portfolio + annuities)
$-
$100
$200
$300
$400
$500
$600
$700
22 28 34 40 46 52 58 64
Tota
l Hyp
othe
tical
Acc
ount
Val
ue (T
hous
ands
)
Value of Income Portfolio Value of Investment Portfolio
Age 25$12 (monthly income) $6,085 (value of total portfolio)
Age 45$306$120,880
Age 65$1,706$562,485
Hypothetical example for illustrative purposes only.
What Service Providers are offering these programs?
Platform Providers Investment Only Providers
Prudential BlackRock
John Hancock AllianceBernstein
Diversified Investment Advisors Prudential
Great West
