Issues in retirement drawdown phase
The issues surrounding the changing US retirement finance market are creating headaches for those in the industry but also a wave of new opportunities.
In a recent Clear Path Analysis report, “Solutions not Products - Mitigating Risks in the Drawdown Phase of Retirement”, co-produced with LGIM America (LGIMA), several industry figures gave their views on the issues surrounding the US’s changing retirement market, especially that data and technology were changing the industry and creating new challenges and opportunities.
“If you don’t name and keep your beneficiary up to date, these assets aren’t going where you are thinking they are going,"
One such way was around the data ownership aspect, especially when it came to customers – and the rise of a holistic service model.
“A point of frustration is keeping the beneficiary on file up to date,” said Chip Weule, Chief Benefits Officer, Fire & Police Pension Association of Colorado (FPPA). “This goes back to retirement planning, estate planning, and generational wealth as you accumulate these assets; if you don’t name and keep your beneficiary up to date, these assets aren’t going where you are thinking they are going,” he said and added that this issue wasn’t unique to the retirement industry but that it related to the specific aspect of trying to educate and engage members of plans to consider their pension/retirement plans more closely.
“There are no comprehensive federal regulations governing cybersecurity for retirement plans and their service providers.”
The issue of data ownership – especially around its management and security – is an ongoing issue in the US retirement arena. AJ Gallagher’s report, “Cybersecurity for Retirement Plans”, on the issues specified that “given the focus on the value of personal data in our society, a conservative approach is to treat plan participant financial data as being a plan asset and take prudent steps to protect it as such,” it said as the US has no comprehensive national law governing cybersecurity and “no uniform framework for measuring the effectiveness of protections,” it said.
“Subsequently, there are no comprehensive federal regulations governing cybersecurity for retirement plans and their service providers.”
Gallagher added that it expected “ownership and control of participant data will continue to be an area of intense interest in the retirement industry and could well be the subject of future court decisions.”
Greatest risks in the drawdown phase
Participants in the report were asked about the greatest risks in pensions and retirement for consumers around the drawdown phase of retirement and what pension planners should be doing to help mitigate this for those members.
Weule said that one of the largest risks was “longevity”.
“Advances in technology, medicine, and healthcare mean that we will live longer,” he said, which meant that if a consumer delayed their savings or cutting down their savings earlier means that they don’t build up that accumulation of the assets toward their retirement.
“If you are going to live longer, how do you live off these balances?” he said. “The other risk is how you translate a Defined Contribution (DC) balance into a monthly income: how do you pay your expenses, and how do you live off this over your lifetime or project that over your lifetime?”
The DC vehicles are good at saving, Weule said, but how they enable those with them to draw their money down is now made trickier. “In most cases, our participants are building up the biggest lump sum of cash they have ever had in their life, and they feel that they are owed their due or choose to spend it right away, which is great if they can do it, but they also need to make sure that they are planning for their full lifetime,” he explained.
“We see a lot of confusion about how you translate a large bucket of money into a stream of income for your life."
Weule’s organisation administers retirement and death & disability plans for firefighters, police officers, and other first responders throughout the state of Colorado.
It also administers local defined benefit pension funds for certain police and fire departments, and for some volunteer fire defined benefit plans. In addition, police and sheriff departments that participate in Social Security have the option of affiliating for supplemental coverage through the Statewide Retirement Plan and Statewide Death & Disability Plan.
“We see a lot of confusion about how you translate a large bucket of money into a stream of income for your life,” he said.
Getting the message out
One aspect raised by many participants in the report was the critical need of getting information to pensions holders and the barriers that existed there. Plan sponsors and investment managers getting critical messages across to members to increase awareness and engagement were seen as the most important reason.
Weule said that the FPPA was in a unique position as its policyholders were concentrated far more than in other areas, but still had to be proactive and creative with getting messages to them.
“We have a field education team, and their job is to go out and meet with the members at their stations and on their time,” he said. “We also partner with our record keeper and have a resource whose sole job is to meet with our members, set up one on ones, and go through plan options.”
“We pay a lot of attention to our web analytics and our messaging i.e., language and word choice."
He also said that FPPA has started paying attention to how they engage with them and the messages that they send more closely over the past four or five years. “We pay a lot of attention to our web analytics and our messaging i.e., language and word choice. We do a lot of what we call A/B testing, this is where we will send the same message or communication out but may change the heading, title, or arrangement. We will also test the time of day or week that we send it out and will manage the results.”
These tools, and simple changes, he said, can make a world of difference.
You can read this in full and see the rest of the report, by clicking here.
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