I only discussed retirement investments with my dad once, and the conversation didn’t take place until he had already decided to retire. He had a pretty good idea about what he wanted to do – he just couldn’t figure out how to accomplish that via the all-too-typically complicated distribution request form. Consequently, at my mother’s instigation, he called in an “interpreter” – in this case, the son with the law degree.
It was a complicated discussion. Since hundreds of miles separated us, he had to read the form to me (I suggested faxing, but that was “more trouble than it was worth”; I chose to assume that was a reference to his difficulty with operating the fax machine on his end, and not the quality of advice he was hoping to get from mine). Fortunately, there is something of a boilerplate design to most of these forms and, in reasonably short order, I was able to wrest an English version of his options from the document.
Having outlined the options for him, I asked him if he knew what he wanted to do. Much to my consternation, he wanted to go with an annuity. Now, the market was still on its way up, and while, even then, we all “knew” a pop was coming, it was hard for his financially astute son to accept that he would want to trade the upside potential of having the money in his own hands/account and the ability to draw down that sum at a pace commiserate with his needs for relinquishing that to the notoriously expensive and somewhat inflexible option of an annuity. But what my dad wanted – more than anything else - was the certainty of a regular income stream. If I couldn’t guarantee him that result with the other options, he wasn’t interested.
Ultimately, regardless of how (or when) we get there, the goal of saving for retirement is to have an income in retirement - a regular, secure paycheck that continues even after we are no longer gainfully employed. On the other hand, today’s approach to retirement savings is largely predicated on accumulating enough money to be able to, after retirement, have enough to live on. The problem, of course, is that if you get to retirement with the “wrong” amount of savings, it is darned near impossible to right the wrong.
Still, if what you ultimately want to wind up with is regular retirement income - an annuity, essentially - why wait 40 years to do so? Why “gamble” on the potential upside of making investment choices in a retirement plan – particularly when you don’t know how much it will cost or how much money you will have at retirement to purchase that annuity?
There are reasons, of course. Participants frequently don’t have any appreciation for what their income wants – or needs – will be in retirement. Indeed, that is what makes retirement savings so problematic for many; they lack a specific goal and, thus, tend to save what they think they can afford, rather than what they may need. But if participants really are weary of having to make, and revisit, all those investment and savings decisions, then perhaps we also need to rethink our traditional approach to helping them achieve their goal. Perhaps their retirement savings investments should be directed, not to the selection of mutual funds from a retirement plan menu, but to a more direct investment in a retirement income stream.
Work to Do
Not that we don’t have work to do. Most of the offerings out there at present are even more complicated than the retirement plan decisions participants already struggle with. Participants still will need help setting goals, evaluating choices and, no doubt, managing an accumulation of these investments over time. Imbedded under the auspices of employer-sponsored retirement offerings, plan sponsors also will doubtless be presented with significant challenges, both administrative and fiduciary, as we work toward a new goal-based solution.
Still, there are already a few firms that have applied this notion to retirement plan savings – that allow participants to invest in an annuity as an option in their 401(k) plan. If our goal truly is to help the participant achieve retirement income security, perhaps it is time we actually figured out the best way to help them make that investment sooner, rather than later.
- Nevin Adams