401(k) Specialist Issue 1 - 2023 - 37
401(k) INVESTMENT INSIGHT
The Final Frontier in 'Pensionizing'
401(k) Plans Faces Similar Challenges
from the Industry's Past
By Scott Colangelo
WITH PENSIONS gradually being phased
out, 401(k) plans emerged as the premier
retirement savings tool. But within these
plans, participants have often been unsure
about participating, deciding what percentage
to defer, and largely uneducated on what
to invest in.
Fortunately, over the past 15 years many of
these challenges have been addressed with
improved plan design solutions offering more
help for participants. Features like auto-enrollment,
auto-escalation and target-date
funds all added great value to the industry.
Yet all of those features merely addressed
the accumulation phase of the retirement
journey. The lack of the ability to " pensionize "
defined contribution retirement has been a
void discussed, debated and legislated greatly
in the past several years.
To meet these needs, the industry has
lobbied for protections to be codified
allowing solutions to be manufactured based
on established guidelines which has led to
product innovation. The SECURE Act helped
fill this void, allowing the issue of retirement
preparedness to come to the forefront.
Despite the impact of fee compression, this
new frontier allowed recordkeepers, fund
companies, and advisors to potentially fulfill
participant needs while potentially generating
new revenue sources. As a result, industry
players worked, and are working, to make
needed product solutions while allowing
them to replace some of their lost margin and
profitability.
Innovation has led business cycles for
several hundreds of years. If successful, these
innovators are rewarded with strong returns,
and then enter the next stage of the business
cycle, where they begin defending their
business from competitors entering the market.
Competitive options typically flood the
market many years after a business model is
" In the case of
merging fixed and
immediate annuities
into retirement
plans, companies
are repackaging
solutions that have
been around for over
50 years. "
proven, leading to commoditization and fee
compression. As margins shrink, consolidation
follows and many businesses fail as they
can no longer compete at the lower margins.
Guaranteed income is clearly in the very early
stage of innovation.
Yet it is important to delineate innovation
from repackaging. Companies thinking
short-term who choose to skip innovating
and simply repackage old solutions, trying to
retrofit them to meet today's needs, do so in
an effort to get to market quickly. The retirement
industry is experiencing this today with
guaranteed income solutions. Many companies
are innovating, yet more are simply
repackaging fixed annuities and immediate
annuities as " new " solutions and hoping that
no one notices. In the case of merging fixed
and immediate annuities into retirement
plans, companies are repackaging solutions
that have been around for over 50 years.
In retirement, the biggest fear most people
have is outliving their money. The fear of having
to depend on their children for help when
their purchasing power declines to unsustainable
levels, and losing their independence
is very real. The knock for decades on these
versions of annuities is that they would lose
purchasing power over time, and the investor
forfeits his principal the very day they take
income. In the 1980s when the average age
of death in our country was in the low 60s,
these were questionable products at best.
Today, with the average age of death being in
the mid to late 80s, these products simply are
not viable, as the longevity risk has increased
dramatically.
For example, suppose you retired last year
in 2021, chose a repackaged immediate or
fixed annuity solution, gave up your principal
and began living on annuity income for the
rest of your life. In one year, due to inflation,
you would have lost over 9% of your buying
power. Imagine compounding just 4%
inflation rate for four more years, and you
will have lost over 27% of your purchasing
power in the first five years of retirement. Are
these the solutions that are going to solve
the needs of tens of millions of retirees in this
country? Innovation is needed.
It is not solely the availability of products
causing challenges, but rather the lack of
education that poses the greatest challenge.
Participants need to be educated on the pros
and cons of various guaranteed income vehiISSUE
1 2023 | 401kSpecialist.com
37
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401(k) Specialist Issue 1 - 2023
Table of Contents for the Digital Edition of 401(k) Specialist Issue 1 - 2023
Table of Contents
401(k) Specialist Issue 1 - 2023 - Cover1
401(k) Specialist Issue 1 - 2023 - Table of Contents
401(k) Specialist Issue 1 - 2023 - 1
401(k) Specialist Issue 1 - 2023 - 2
401(k) Specialist Issue 1 - 2023 - 3
401(k) Specialist Issue 1 - 2023 - 4
401(k) Specialist Issue 1 - 2023 - 5
401(k) Specialist Issue 1 - 2023 - 6
401(k) Specialist Issue 1 - 2023 - 7
401(k) Specialist Issue 1 - 2023 - 8
401(k) Specialist Issue 1 - 2023 - 9
401(k) Specialist Issue 1 - 2023 - 10
401(k) Specialist Issue 1 - 2023 - 11
401(k) Specialist Issue 1 - 2023 - 12
401(k) Specialist Issue 1 - 2023 - 13
401(k) Specialist Issue 1 - 2023 - 14
401(k) Specialist Issue 1 - 2023 - 15
401(k) Specialist Issue 1 - 2023 - 16
401(k) Specialist Issue 1 - 2023 - 17
401(k) Specialist Issue 1 - 2023 - 18
401(k) Specialist Issue 1 - 2023 - 19
401(k) Specialist Issue 1 - 2023 - 20
401(k) Specialist Issue 1 - 2023 - 21
401(k) Specialist Issue 1 - 2023 - 22
401(k) Specialist Issue 1 - 2023 - 23
401(k) Specialist Issue 1 - 2023 - 24
401(k) Specialist Issue 1 - 2023 - 25
401(k) Specialist Issue 1 - 2023 - 26
401(k) Specialist Issue 1 - 2023 - 27
401(k) Specialist Issue 1 - 2023 - 28
401(k) Specialist Issue 1 - 2023 - 29
401(k) Specialist Issue 1 - 2023 - 30
401(k) Specialist Issue 1 - 2023 - 31
401(k) Specialist Issue 1 - 2023 - 32
401(k) Specialist Issue 1 - 2023 - 33
401(k) Specialist Issue 1 - 2023 - 34
401(k) Specialist Issue 1 - 2023 - 35
401(k) Specialist Issue 1 - 2023 - 36
401(k) Specialist Issue 1 - 2023 - 37
401(k) Specialist Issue 1 - 2023 - 38
401(k) Specialist Issue 1 - 2023 - 39
401(k) Specialist Issue 1 - 2023 - 40
401(k) Specialist Issue 1 - 2023 - 41
401(k) Specialist Issue 1 - 2023 - 42
401(k) Specialist Issue 1 - 2023 - 43
401(k) Specialist Issue 1 - 2023 - 44
401(k) Specialist Issue 1 - 2023 - Cover3
401(k) Specialist Issue 1 - 2023 - Cover4
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