5 common approaches to offering retirement income in your retirement plan

Employers have an opportunity to help pre-retirees transition their retirement plan savings into an income stream or a “paycheck” in retirement. When building a retirement income portfolio, retirees need a comprehensive strategy that includes two broad types of income: guaranteed income and non-guaranteed income.

Employers should offer an array of solutions that are easy to understand, simple to implement and can provide a greater feeling of financial confidence. When paired with education, financial guidance and easy-to-use digital tools and experiences, employees can gain the confidence and know-how needed to reach their unique retirement goals.

Consider these five methods to incorporate retirement paycheck features in your plan design:

1. Systematic Withdrawal:

What is it? A distribution option under which a portion of the participant’s account is automatically and periodically liquidated and distributed. Typically, systematic withdrawals are set up to pay out monthly, quarterly, semi-annually or annually.

How does it work? A systematic withdrawal payment is established with the plan’s recordkeeper and may be based on a flat dollar amount or a number of payments. Systematic withdrawals provide level payments that are then withdrawn pro rata from each investment option. The participant can change their systematic withdrawal amount.

Pros:

• Provides a simple option for a participant to receive periodic, level payments through systematic withdrawals.

Cons:

• No guaranteed protection from longevity risk. There is a risk that payments could be reduced over time if the account balance decreases due to market performance or accelerated withdrawals.

2. Managed account with income emphasis

What is it? A managed account typically uses a plan’s existing core investment options to create an asset allocation and optimal withdrawal strategy unique to each participant.

How does it work? Managed account services provide professional management for employees near retirement and those seeking to turn their retirement savings into steady income. The participant receives a customizable solution incorporating an asset allocation and optimal withdrawal strategy that can be adjusted based on personal circumstances.

Pros:

• Professional management provides employees with a custom accumulation and income plan based on their unique time frame and risk tolerance.
• Participants have access to a professional manager for personalized support.

Cons:

• Some participants may be hesitant to hand over control of their account to a professional manager. The service may include additional fees.

3. Managed payout fund

What is it? A managed payout fund is a mutual fund designed to produce steady monthly income payouts by turning investments into an income stream.

How does it work? A managed payout fund strives to provide steady monthly payments to help investors meet their income needs by setting a payment rate that is typically reset annually. These funds are managed to provide income and long-term capital preservation.

Pros:

• Provides a participant with a predictable income stream in retirement, while still allowing the participant to access their full account value.
• If there is a balance at the time of death, it would be paid out to a beneficiary.

Cons:

• No guaranteed protection from longevity risk. There is a risk that payments could be reduced over time if the account balance decreases due to market performance or accelerated withdrawals. These options are relatively new to the marketplace, so they are not yet well known or understood by participants.

4. Intelligent withdrawal tool

What is it? An intelligent withdrawal tool integrates technology that helps participants better understand and optimize their “paychecks” in retirement.

How does it work? An intelligent withdrawal tool combines technology with professional asset management and is designed to generate total returns to support periodic withdrawals in retirement, while minimizing downside risk and maintaining potential for capital appreciation. The tool helps a participant determine how much they can withdraw to meet their individual needs. A participant may use an intelligent withdrawal tool to calculate their systematic withdrawal amount mentioned above.

Pros:

• Provides a participant with a predictable income stream in retirement, while still allowing the participant to access their full account value.
• If there is a balance at the time of death, it would be paid out to a beneficiary.
• The participant has the flexibility to customize the income stream to meet their specific needs.
• This tool offers a simple yet customized solution that helps participants continue to keep their money in the plan as they begin to withdraw assets in retirement.

Cons:

• Like managed accounts, there is no guarantee of longevity risk.

5. In-plan annuity

What is it? An in-plan annuity is an investment product that pays out a fixed or steady income stream, usually over the lifetime of the employee. There are different types of annuities, including fixed, variable, immediate and deferred.

How does it work? A contract with an insurance company allows an employee to convert part of their retirement savings into a “personal pension” — an income stream designed to last the lifetime of the employee (or employee plus spouse). The employee chooses the date to start the income stream. Different provisions are available, including cost of living increases, variable options tied to market performance and guaranteed minimum payouts if the employee dies prematurely. An employee can buy in to the annuity within their employer’s retirement plan, either in a lump sum at retirement or gradually during their working years.

Pros:

• For participants: Guaranteed lifetime income protects against longevity risk and the risk of spending too much/too little, minimizing the fear of running out of money. It allows an employee to diversify their income sources if they use only a portion of their savings to purchase the annuity. Typically, annuity fees can be lower when purchasing in-plan.
• For plan sponsors: Gives employees more security and peace of mind by providing lifetime guaranteed income, which can help to alleviate stress in the workplace. It can motivate employees to keep their money in the plan at retirement.

Cons:

• For participants: Depending on the type of annuity, the participant may have limited flexibility to change their monthly payment amount and may not have access to the account value in an emergency. Annuity fees can be higher than mutual fund fees because the higher fee is paying for the insurance cost of lifetime income.
• For plan sponsors: There is a potential fiduciary risk around the selection of the annuity provider. Annuities can be complex, which makes it harder to educate employees about potential benefits.

Flexible income is the best outcome

Thanks to evolving technology and economic shifts, the way people retire will continue to change over the coming years. Rather than choosing a specific date to stop work and “start retirement,” employees are increasingly choosing to continue to work past their retirement date, resulting in a “partial” or “phased” retirement.

Giving employees reliable retirement income options — no matter when or how their retirement begins — is crucial to defining a program’s success.

Contact your Voya representative today to find out how you can help prepare your employees to turn their retirement savings into retirement paychecks.

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