Employers urged away from lump-sum payouts

Employers can help employees manage their savings after they retire by offering investment options instead of a lump-sum payout, an analysis by Mercer says.

The human resources consulting firm used data from the Stanford Center on Longevity and the Society of Actuaries to examine three options for managing retirement income: systematic withdrawals, immediate annuities and hybrid products.

Mercer said each was better for employees than giving them a lump-sum upon retirement. That’s because most people are not equipped to invest their funds or withdraw them in a way that allows them to maintain their lifestyle while preserving principal.

The use of systematic withdrawals allows retirees to plan because the amount of money available each year is often constant. The potential problem with this method is that retirees can exhaust their nest eggs if they outlive their life expectancy.

Mercer said the money can last longer if employers offer low-cost investment funds or carefully selected, actively managed funds that are expected to have a higher return.

Mercer looked at two systematic withdrawal systems. In the first, the amount was fixed at the start of retirement and adjusted each year for inflation. Using the employer-offered investment funds made the money last about three years longer than if retirees invested on their own.

In the other withdrawal system, the withdrawal amount was a constant percentage of assets at the beginning of each year. Mercer said the funds would last indefinitely because the actual amount available each year would rise and fall based on return on investment.

Secondly, Mercer considered how offering employees an annuity would affect retirement. The benefits of such a program, it said, include guaranteed income for life, a potential to increase retirement income by as much as 20 percent and low transaction fees compared to other investments.

Finally, Mercer looked at hybrid products, which offer longevity protection combined with the opportunity for higher income, if investments do well. The Stanford center looked at guaranteed minimum withdrawal benefit plans, which combine annuities and investments. Retirees who opt for this kind of plan can reap the benefits of higher investment return while protecting themselves against losses. Such plans purchased through insurance companies carry lower fees than similar retail products.

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