The Americans are turned off “pensions” and onto 401Ks by Motley Fool and their like

You can see why wealth managers prefer 401K and why “pensions” are seen as bad news

Benefit Jack

But there are some people in the USA like Benefit Jack and I suspect that like in the UK, these people worry about the millions who don’t want to manage their retirement pot and are worrying in these days as their 401ks diminish.

My friend Benefit Jack has some interesting ideas from his experience of the US markets.and how they can be used to turn pots from 401K “pensions” into something like a pension. He wrote to me and me being vain was flattered to be asked questions by someone whose articles come with a lot of links to US research. Here is the gist of his question…

So, I was wondering whether, in the UK, if the “State Pension” has an increase if an individual defers commencement, as I suggested should be the base or default decumulation strategy for 401k plans here in the states.

If not, that would be my recommendation for you to consider in terms of converting a pension pot to retirement income – to add such a feature where, if the normal retirement age is 66, allow for a delayed commencement (with perhaps a 8% – 9% per year increase in the nominal amount) up to age 75. So, if the full rate of new State Pension is £230.25 a week, a 9% deferral increase would increase the benefit .75% per month, and deferral from age 66 to age 75, would increase the full rate of a benefit of £230.25 a week to £545.08 a week at age 75.

Now I know there are actuaries who can explain the advantages of deferring taking the state pension relative to receiving it.  It is interesting to think of a pension pot as a bridge to a pension coming later, whether that pension comes from the state or from a combination of state and private pension (or annuity).  Would providing a bridging pension be a default option for those who are income poor and wanting to retire before their state pension. Is this an option for workplace pensions where the income is most needed immediately. Benefit Jack goes on from a perspective that makes sense to me and I know a lot of people who read this blog.

I suggest the state because there is no “profit” margin to fund, and because the state pension is a given – the administration is there, and isn’t going anywhere, plus it is relatively well known and straightforward, not complex.

With respect to private annuities, at least here in the states, the pricing is almost always much less favorable because the only people who annuitize are those who seem mostly confident that they will survive beyond the “calculated” “estimated” “imagined” “break point” – where the annuity, or the survivor benefit or both are perceived to be a “good buy”.

However, if it is close, or if you don’t think you can recover the investment (die prematurely), you don’t buy.

Would the state benefit if there were a subsidy to defer in excess of the actuarially-equivalent benefit paid at a later age? Could the state price in the value of people working longer? Would there be less demand on other welfare or entitlements? Could you include an added penalty for early claiming (kind of what America did in the 1983 changes, by moving the normal retirement age from 65 to 67 today) by raising the normal retirement age from 66 to 67 as a means of funding the subsidy for deferred commencement?

Well we look like having workplace pensions that are for those who are starting saving but never get enough to get a lifetime income that is worthwhile. Might it not be a default with pension pots of less than £10,000 to take a proper income prior to state pension and have their tax-free income as savings? Has anyone had these thoughts? Is this the case of Jack opening a new thinking?

Benefit Jack has sent me a blog he did in 2019 which you can’t access anymore – other than on this blog. Come on lads tuck in!

SECURE, Ben Franklin and Looking For a Few “Good” Plan Sponsors
JACK TOWARNICKY
09/15/2019

You may have noticed that the SECURE Act has stalled in the Senate.1 One much-discussed provision would change fiduciary requirements for adding an in-plan annuity.

I am a Frank-o-phile – a big-time fan of Ben Franklin. My sister Carol lives in Philadelphia (sisterly love).3 She once took me to Ben’s 300th birthday celebration at the National Constitution Center.4 And, one of Carol’s Christmas gifts to me is a favorite – a Ben Franklin action figure – push the right spot on his chest and you get one of over 100 famous quotes.

So, what does SECURE have to do with Ben Franklin? In-plan annuities remind me of a frequently misused Ben Franklin quote,

“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”

Ben was defending the authority of the Pennsylvania legislature to tax its citizens and to govern in the interests of collective security, in response to frontier challenges that were part of the French and Indian War.

Today, I’m substituting flexibility for liberty and security for safety when I paraphrase Ben, “Plan sponsors who add an in-plan annuity to a 401(k) or 403(b) plan subject to ERISA are introducing a default payout structure that is unnecessary, an option that reduces retirement security because an in-plan annuity is suboptimal for the majority of participants.”6 You can quote me.

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Unnecessary?

Yes. During thirty plus years in plan sponsor roles over five different decades, I encountered very few participants who expressed an interest in using plan assets to purchase an annuity.

So, no surprise that only a handful of plan sponsors have added in-plan annuity options; just slightly more have selected a vendor for individual annuity purchases. Instead, most plan sponsors have avoided offering in-plan annuities, or, like me, have taken action to remove in-plan annuity options back in the early 1980’s to reduce compliance burdens.

Most plan sponsors direct interested parties to the individual market. Finally, because demand remains weak, most plan sponsors continue to avoid annuities.

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Reduce retirement security?

Yes. Most American households are (and will be) highly annuitized.

Most older Americans already hold most of their wealth in an annuity-equivalent form: future Social Security, DB plan benefits, and owner-occupied housing. So, most near-retiree US households are already highly annuitized.10 Adding in-plan annuity will add new costs, new administrative requirements and additional compliance complexity for an option most don’t need.

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Suboptimal?

Yes. An in-plan annuity must use unisex mortality factors. Often, male participants can obtain an annuity with greater income from the individual marketplace. For married workers, compliance requires a default in the form of a 50% contingent annuity (unless the spouse consents to a different form of payout) – as if that payout option is optimal for all individuals who are married when they commence payout.

So, Is There A Better Alternative?

Most recently, the Society of Actuaries posted a related study that concludes the optimal retirement income solution for most middle-income workers is something they call the Spend Safely in Retirement Strategy (SSiRS), a combination of:

• Optimizing Social Security benefits by delaying commencement until age 70 to maximize the amount of guaranteed, indexed, lifetime income;
• Generating retirement income from savings to gap-fill income needs up to age 70, then beyond by using the IRS required minimum distribution (RMD) rules; and
• Investing using a low-cost index fund, target-date fund, or balanced fund.

I’m convinced. The best implementation alternative might be to add SSiRS functionality as the default payout option – to force workers who prefer cash or an annuity to make an affirmative election.

Today, the “default” payout option is a lump sum at age 65 or the required beginning date. In many plans, the “default” payout option uses annual installment payments that comply with required minimum distribution rules.

For the latter group, deploying the SSiRS functionality simply requires the annual installment payment process to commence at the time payments start and to include an additional income amount equal to the amount of Social Security benefit commencing at age 70.

I am still looking for a few “good” plan sponsors who would like to experiment in this space. Send me a note: jtowarnicky@usaretirement.org