Decumulation: Better Education, Use of Auto Features Key

Decumulation—spending down retirement savings—is, of course, ultimately the end result of a lifetime of saving for retirement. But how that is done can be an issue; a recent blog entry argues that education and how automatic features are used are key to responsible withdrawals. 

In “Withdrawing 401(k) Funds After Retirement Is Not the Problem: Here’s What Is,” Brian Allen, Founder & Chairman of Pension Consultants, Inc. argues that it is essential to educate participants in order to equip them to make withdrawals in such a way that they will not outlive their funds. But the time to start that is not when they are about to retire, he indicates—such education should start when employees are young, long before their retirement is on the horizon. 

“The typical American, when reaching retirement age, doesn’t know how to withdraw funds from their 401(k) in a way to make the money last the rest of their lives,” writes Allen, which he argues is serious “because many retirees worry about outliving their 401(k) savings—and with good reason.”

Allen takes issue with the notion that annuities—and making it mandatory that they be offered—is the answer. He argues that the “big problem” is not helping retirees to spend down their money responsibly. Rather, he says, it’s getting them to save what they need for retirement. This, he posits, should not be news, and notes that frequent surveys warn about lackluster saving that will be insufficient to cover a comfortable retirement. 

Really helping people means getting them to make sufficient contributions to their retirement accounts, Allen says. He says that automatic enrollment, escalation and re-enrollment are “big positives,” but even they are not enough. For instance, he observes, many plan sponsors have adopted automatic features at low contribution levels. Often, he says, they set auto features at 3% of compensation; if the employer matches 50% of that, the contribution amounts to 4.5%—a level, he warns, that will not result in sufficient retirement savings. 

Action Steps 

Allen offers ideas concerning how the situation can be improved: 

• Better educate plan sponsors and plan fiduciary committees regarding how much people need to save. 
• Set auto features at a higher contribution level from the start.
• Set automatic increases in contribution levels. 

“A concerted effort here would be much better public policy than helping people figure out what kind of withdrawals they should make over their retirement,” Allen says.