Over the next dozen years, baby boomers, those trend-setting, iconoclastic, and often sharp-elbowed children of the Greatest Generation, will leave the workforce in droves. Unlike their parents, many won’t get a regular pension check. Enrolled predominantly in defined-contribution plans, they’ll receive a lump sum of money — an approach that will benefit some but put many others in fiscal peril.
Minus the security of a check, millions of boomers will confront longevity risk — the possibility of outliving their assets. They must manage that lump sum to last a lifetime, not the easiest thing to tackle in one’s 70s, 80s, and beyond. Rising concern over employees’ post-retirement welfare is prompting companies, and the federal government, to help workers in their last working years make the right decisions about their future needs.
To be sure, the emphasis is on information and communication, but some companies are taking more-concrete steps. Some are tapping new annuities that essentially convert a defined-contribution plan into a defined-benefits plan. Others are pushing programs that provide for catch-up contributions to 401(k)s. And many are helping employees make better retirement decisions.
Behind these efforts is a recognition that the elimination of defined-benefits plans comes at a cost. Given economic uncertainty and the fact that people live longer, there are no guarantees that retiree money will last a lifetime. To fill the void, says Jack Brennan, CEO of Vanguard, companies need to both develop a “philosophy” about dealing with retiree money and implement programs to help employees transition from savers to spenders. “You want your employees to be successful in retirement because they will still impact morale after they are gone,” he explains. But companies must be cognizant of the fiduciary responsibility embedded in offering retirement guidance — and employees must accept the risk of a possible shortfall.
Wanted: A Stream of Income
Defined-benefits plans relieved retiree apprehension in the past, with past being the operative word. In the past two years, one third of plan sponsors surveyed by the Employee Benefits Research Institute have closed or frozen their defined-benefits plans. And McKinsey & Co. estimates that by 2012, 50 to 75 percent of private-sector defined-benefits plan assets will be frozen.
In their place, of course, are defined-contribution plans, which now hold 70 percent of the $11 trillion in boomers’ invested assets, according to Prudential Financial. Many retirees tend to roll over these assets into an IRA or cash in the proceeds. But a survey of 401(k) participants by Mercer indicates that 80 percent are “less than comfortable” making retirement investment decisions. And 70 percent of preretirees in a Prudential Financial survey wished they had an “autopilot plan” defaulting them into a lifetime income program.
Such insecurities have led to the introduction of products such as target-age or life-cycle funds, which automatically rebalance 401(k)s, as well as a renewed interest in annuities. In fact, in the last year providers have taken the tarnish off the latter, restoring some luster to a much-maligned product. Whereas yesterday’s annuities stopped payment upon death, for example, newer versions allow beneficiaries to receive payments. And employers are helping by leveraging their clout, offering annuities as a company benefit. “You have a lot more buying power if you’re General Motors rather than John Smith,” says George Castineiras, senior vice president at Prudential Financial.