When employers design retirement plans nowadays, they might want to keep in mind that employees sometimes have different goals for their accounts that may not include a lifetime income stream at retirement.
A study by the National Association of Government Defined Contribution Administrators Inc. points out that many plan participants might have other retirement accounts in place and view their employer-sponsored plan as something they can use to enhance their lifestyle in retirement or pass on to their heirs after they pass away. Others, meanwhile, have balances too small to use as a meaningful long-term income source so would view their accounts as a special resource for an emergency or major purchase.
The bottom line is that a "one-size-fits-all" approach isn't typically best.
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For that reason, the association advices that, in evaluating plan options, plan sponsors should consider the following seven areas: conversion, longevity, risk management, utility, communication, administration and portability:
1. Conversion: Converting an account balance into an income stream may seem like the ideal objective for most plan participants, but the risk for many is that they retire with a substantial account balance that could provide retirement security but they squander it by making large withdrawals. If they have access to defined benefit pension plans or Social Security, those two accounts could negate the need to convert 401(k) plan assets into a retirement income stream.
2. Longevity: People are living longer, which means it is essential to consider the effects of inflation on retirement income streams to ensure that purchasing power remains steady throughout retirement.
3. Risk Management: Keep in mind a participant's risk tolerance and investment objectives when devising a retirement income strategy. Participants who are less dependent on their defined contribution accounts may be comfortable with taking on more risk, but those who are dependent on their accounts may not be able to take on any risk. It's important to provide flexibility when coming up with a retirement income strategy.
4. Utility: Make it easy for plan participants to change their distribution elections as their circumstances change over time.
5. Communication: Plan sponsors should evaluate any product or service available in their plan against the benchmark of whether participants will respond positively to the concept. When developing retirement income strategies, plan sponsors should invest the time and effort to gauge the communications burden and effectiveness of individual strategies and the possibility of other strategies.
6. Administration: Plan sponsors should evaluate the administrative burdens placed on them, including procuring and executing contracts with service providers, communications, consulting expenses, required staffing resources and ongoing oversight and monitoring.
7. Portability: Any income stream strategy that is adopted must be evaluated for portability. Non-product tools such as period payment streams provided through a third-party administrator may be easy to transfer from one administrator to the next, but many product tools could create challenges.
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