Most retirement benefits today are provided in defined contribution (DC) plans. For participants in these plans, retirement planning is anything but simple. By the time they approach retirement-or ideally much earlier-they need to understand a number of complex risks that threaten their future income, including equity risk, interest rate risk, longevity risk and inflation risk.

How can they use the assets built up in their plans to create an income stream that will carry them through retirement? What can employers with a DC plan do to help them?

One resource for sponsors of DC plans to help their participants deal with the complexities of retirement income security is The Society of Actuaries (SOA). Over the last few years the SOA has conducted extensive research into the issue of retirement readiness and has produced objective educational resources for employers and employees.

Anna Rappaport, chair of SOA's Committee on Post-Retirement Needs and Risks, says that for SOA to serve as a resource on retirement advice is a departure from tradition. "What drove us toward it was that our research has continually shown that there are gaps in people's financial literacy" as they prepare for, and enter, retirement. "Employers put a lot of money into their benefits. If employees don't use them well-don't get a good result-they have to question how much value are they getting for their money."

Rappaport's committee and the Stanford Center of Longevity collaborated on a research paper in 2013, titled The Next Evolution in Defined Contribution Retirement Plan Design-A Guide for DC Plan Sponsors to Implementing Retirement Income Programs. The study notes, "Robust retirement options aren't widespread among defined contribution plans. The primary reason is how plan sponsors view their defined contribution plans; according to one study by MetLife in 2012, 91% view them as saving plans, while only 9% view them as vehicles for providing retirement income. A cultural shift is needed: Employers and plan sponsors need to commit to operating their plans as true retirement plans."

To help them in making this shift, this and other SOA research papers and publications discuss the features of a wide range of products, as well as retirement advice and guidance services. The retirement income products discussed in the 2013 paper include those that are provided both inside and outside of a retirement plan. The SOA's analysis is designed to guide an employer in helping employees build a viable income stream beyond their retirement date.

Among the in-plan retirement income solutions covered in the 2013 paper are installment payments coupled with target date funds; professionally managed accounts; deferred or immediate group annuity contracts; annuity bidding services; Guaranteed Minimum Withdrawal Benefit (GMWB) annuity contracts; and solutions that combine systematic withdrawals and annuities.

Out-of-plan solutions discussed are managed payout funds, annuity bidding services, immediate annuities and longevity insurance.
Whatever strategy an employer may use in setting up a retirement planning solution, the study recommends implementing a default retirement income-generating option that would become effective when a retiree fails to make an election. This can "minimize plan sponsor fiduciary liability," the study notes.

Last year the SOA published Investment and Retirement Advice-A Guide for Employers, which discusses options for employers that want to include education, guidance or advice as part of their retirement plan. The advice services covered range from automated services (sometimes called robo-advice) to face-to-face conferences between employees and financial advisors. It includes discussion of cost, liability, administration and security.

Rappaport stresses, "The Society of Actuaries doesn't recommend any specific service or company, nor do we recommend any specific strategy; we present the options and the business questions that people need to think about in reaching a decision about what they want to do.

"One thing a small employer might do, beyond what their 401(k) vendor provides, is to say to its employees, 'We know it's important for you to have some advice and we'll support it. You pick an advisor and we'll pay a certain amount toward the advice fee.'" This relatively simple approach appeals to employers who are concerned about potential liability, she says.

Rappaport, whose actuarial career spans more than 50 years, has written extensively about post-retirement financial risks, and she frequently serves as a speaker at industry meetings on this topic. She cites what she calls a "dramatic example of something employers can do" to help boost the chances that their employees will have a more secure retirement.

"It's almost a no-brainer," she says. "A huge impact on how well-off people will be in retirement is when they choose to claim Social Security. For many middle class people it ends up being a big part of their income. It's even more important for the widow because for about 40% of them, it's all the income they have.

"If you claim Social Security at age 70, you get about 75% more income than you do if you claim it at age 62. Now, granted you get it for eight years less. If you're going to live a long time, it's more valuable to claim it later. I'm not saying employers should tell people to claim late, but if you could get employers to tell people, 'This is really important. Here are a couple of places you could go to check out how this works for you,' that would be a big step forward."

The SOA's 2013 research paper emphasizes this argument in detail by citing a publication by Dr. John B. Shoven, director of the Stanford Institute for Economic Research, and Sita N. Slavov, which advocates that retirees draw down savings first and delay the start of Social Security to age 70-in effect, using their savings to purchase a higher annuity from Social Security.

Employers have a vested interest in the retirement readiness of their employees, especially older employees. More than just guidance on investing their plan balances, employees need direction in looking at the bigger picture of income generation in retirement. The SOA's publications can help employers consider ways to provide this help.

The author
Thomas A. McCoy, CLU, retired in 2013 as editor-in-chief of Rough Notes magazine.