How will you take money from your retirement account when the time comes?
Should you use, if you have such options, the in-plan decumulation/retirement-income products or should you use out-of-plan products?
Now, truth be told, most plan sponsors dont offer and dont plan to offer in-plan decumulation/retirement-income products such as qualified longevity annuity contracts or retirement-income mutual funds according to the 2016 Plansponsor Defined Contribution Survey. But many large plan sponsors, roughly 50%, may allow systematic withdrawals from their plans to help participants create an ongoing income, with regular distributions made to mirror paychecks, according to Plansponsor.
But lets say your plan does offer in-plan decumulation/retirement income products? How might you go about deciding whether to use the in-plan option(s) or the out-of-plan options?
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Thats a tough one to answer simply, said Christine Russell, a retirement strategist at Christine Russell Retirement Consulting. If we are talking about true decumulation products like annuities or a QLAC, rather than merely taking distributions from the 401(k), then I might look at three areas.
And those would be:
Does the 401(k) get some special fee breaks because either the plan sponsor has negotiated a better deal lower fees for participants than might be available in the same retail product or because the plan assets are great enough to allow lower pricing?
Because of fiduciary rules, the 401(k) plan sponsor probably did due diligence on the insurance company and products chosen for the plan. That might give a participant some peace of mind, at least initially, said Russell. Its no guarantee the product will always meet acceptable criteria though.
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Many 401(k) plans do not offer many decumulation products, said Russell. Or the decumulation products offered within the 401(k) might not generate enough income given the 401(k) account balance, so the employee must use outside products anyway, she said. For employees it may be easier to meet their decumulation needs using investment products outside the plan. In that instance, she said, it may be easier to choose specific decumulation outside the plan, while keeping the 401(k) invested in the market to provide the growth that is needed to compensate for retirement longevity.
For his part, Eric Park, a certified financial planner and an investment consultant at LPL Financial, said plan participants should make an inventory of choices within and outside the plan. This may get exhaustive the inside alternatives might be well summarized by the plan the outside alternatives list could get very long, he said. This is a landscape that is changing quickly, with some because of recent regulatory changes and promises to keep changing. The new DOL changes are pushing transparencies and that is a very good thing.
While the environment is changing both for alternatives within plans and those outside the outside alternatives are changing quicker and so might have more variety, he said, agreeing with Russell.
The cautionary note is that because of the somewhat looser environment outside alternatives may present more alternatives but with lots of important details, Park said. With in-plan alternatives have more oversight and with that comes slower evolution.
Park also noted that some plans offer advice this is intended to reduce some of the conflicts of outside advisers. That said, advisers connected to the plan many times constrain solutions to those associated with the company they work for, limiting alternatives, he said.
Focus on strategy
For his part, Joseph Gordon, a partner with Gordon Asset Management, said plan participants might focus less on product and more on creating a retirement-income plan custom built around their facts and circumstances.
He noted, for instance, three popular strategies used by retirees and their advisers to better manage sequence of returns risk:
The bucket strategy in which bucket one is supposed to provide income for one to five years; bucket two is for assets that will fund retirement in the next five to 10 years; and bucket three is for assets that will be needed in 10-plus years.
According to Gordon, bucket one would contain mostly low-duration fixed-income investments, annuities, and cash; bucket two would contain mostly bonds and perhaps utility stocks; and bucket three would contain 100% equities, hopefully diversified and paying dividends.
Another strategy, the guaranteed-expense strategy, would have you buy an annuity to cover, along with Social Security, most fixed expenses. And then you would invest the surplus, whatever is not needed to fund essential expenses, in dividend-paying stocks.
And still yet another strategy is the foundation/endowment model. With this strategy you would balance the need for income with the desire to mute downside risk/volatility so the use of hedging is important to smooth returns, said Gordon.
Not surprisingly, the experts said plan participants should not take the decision to use in-plan versus out-of-plan decumulation/retirement income products lightly. Demographics, the decline in defined benefit plans versus defined-contribution plans and the vast number of alternatives make this equation very difficult for participants, said Park. There is no do-over or mulligan do it wrong and your retirement financial viability is impacted forever. It is a lot of pressure.
So, what might you do to increase the odds of making the right decision? I would suggest they consider engaging a fiduciary, fee adviser by the hour cost as an initial sounding board, said Park.
Acknowledging the conflict, Park said working with a certified financial planner would be best. Insist on paying them by the hour, so as to eliminate conflicts, he said. While a first meeting for free is OK, much beyond that turns the effort into a marketing scam. Avoid people who do not work by the hour. Ask what their hourly rate is, if they dont have one, move on. The participant can always go back to the adviser later if they want to, but pay for the advice.