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De-Accumulation: Don’t Sleep on Distribution Options

Many resources of time, effort and money are expended to get people to save for retirement. But less common is an effort to empower plan participants to use what they have saved in a deliberate way that helps better ensure financial solvency during retirement for as long a time as possible. A recent report argues that an employer-provided retirement plan should offer a means to do that.

In “The Evolving DC Plan — From Accumulation to De-Accumulation,” Bob Melia, Vice President of Product Development for the Retirement Plan Services Product and Solutions Management team at Lincoln Financial Group, writes for the Institutional Retirement Income Council that, “Today’s employees have greater demand for products that can help them not only to save during their working years, but also to draw retirement income after they retire.”

Melia posits that current and longer-term concerns and trends heighten the importance of equipping employees to draw upon their retirement savings in a deliberate and responsible way. This includes the warnings that the Social Security system may be insolvent in the future, the importance of employer-provided retirement plans and increasing longevity.

Not only that, Melia observes, policies, regulations and studies from multiple federal agencies “have nudged both employers and employees to rethink (or to think for the first time about) de-accumulation strategies from DC plans.” These include not only reminders, tips and guidelines concerning rollovers, but also proposals that quarterly statements to participants include projections of DC balances to age 65 as well as their conversion to projected income streams.

A gradual drawing down of retirement plan assets also “would enable most participants to receive good value, lower fees and, in many instances, institutionally priced de-accumulation products and services — which are generally either not available or are more expensive in the retail space.”

The Bottom Line

De-accumulation also carries with it benefits for employers, Melia indicates. “An organization’s willingness to offer such products will enhance their ability to attract top talent,” he argues, adding that such strategies “can advance the employer’s goal of effectively managing their human resources.” He says that it can accomplish this by motivating high performance and by facilitating “orderly, on time” retirement, while at the same time “giving their employees access to good, institutionally priced products and services.”

Not only that, Melia suggests, since de-accumulation can help keep a plan’s asset levels and average account balances high, it offers the prospect of lower fees, since generally service providers often charge lower per-participant fees to plans that have higher asset levels and average account balances.

Melia expects that “one of the next evolutions of plan design will be the distribution options” employers offer their employees as part of their DC plans. “More than ever,” Melia writes, “DC plans need to look at de-accumulation products and strategies for their participants.” As DC plans continue to evolve, he writes, “and as plan sponsors review their plans’ objectives and distribution options, they must frame their decisions by asking which drawdown strategies are in the best interests of their plan participants.”