The Institutional Retirement Income Council, a nonprofit thinktank for the institutional retirement industry, has publishedinformation to help defined contribution plan sponsors provideretirees and workers nearing retirement with a financially secureretirement.

IRIC highlights six major risks that both retirees and employeesnearing retirement face in retirement and offers measures thatemployers can take to help their workforce and retirees mitigatethose risks.

The report found that how plan sponsors approach the topic ofretirement savings can have a major impact on how their planparticipants approach retirement.

“We hope plan sponsors opt to focus on participant retirementincome adequacy, rather than simply investment returns, savingsrates and participant rates,” said Rod Bare, an IRIC advisor andco-author of the issue brief. “While those metrics are partof what makes a DC plan successful, DC plans are now a primarysource of retirement income for millions of American workers, andso the objective needs to expand. Employers who understandthis can act accordingly, in the best interest of their planparticipants.”

“Quantifying Key Risks in Retirement” looks at sequential,inflation, longevity, interest rate, health care and behavioralrisk.

• Sequential risk: A retiree heavily invested in equities atretirement is exposed to excessive risk. Plan sponsors canhelp mitigate sequential risk by encouraging participants to investmore conservatively during the years approachingretirement. This can be accomplished through offeringeducation, asset allocation solutions, or guaranteed retirementincome products that provide downside protection in the form oflifetime income.
• Longevity risk: Plan sponsors can help participants addresslongevity risk – the risk of living well beyond one’s lifeexpectancy in retirement – by offering participants an immediate ordeferred life annuity, thus providing a steady flow of income forlife.
• Inflation risk comes into play when price increases eat away atone’s standard of living, the report said. To mitigate that risk,plan sponsors can offer retirement participants the option to takeautomated systematic withdrawals with a cost-of-living-adjustmentor to purchase an annuity with a COLA.
• Interest rate risk is the possibility of encountering low bondreturns and high annuity prices. Low interest rates depress thecoupons paid out by bonds, and if interest rates rise, the marketvalue of the bonds will decline. Low interest rates usually lead toan increase in the price of annuities, or an investor receiving alower payout for the same amount of principal. Giving participantsthe option to invest in a short-term bond portfolio may be the bestway to help them avoid locking in low interest rates for the longterm, the report found. In terms of purchasing an annuity,dollar-cost-averaging into an annuity prior to retirement, orholding long-duration bonds that closely track annuity prices, canmitigate interest rate risk.
• Unexpected health care expenses is another major risk inretirement. Plan sponsors can offer access to institutionallypriced long-term care insurance with education. Improving employeehealth and wellness is becoming increasingly important to manyorganizations.
• Behavioral risk is the possibility of human biases getting inthe way of sound decision-making about retirement. Retirees couldspend their retirement portfolio too quickly or not considerannuity options, the report stated. Plan sponsors couldmitigate this risk by putting participants on auto-pilot byoffering a default investment option that helps protectparticipants from themselves by combining liquid assets andretirement income-oriented insurance products.

“DC plan sponsors can be a valuable resource for their planparticipants who are near retirement and can have a positive impacton their employee’s retirement outcomes. With a betterunderstanding of these risks, plan sponsors will be in a muchstronger position to help their workers nearing retirement. Many of these risks are interrelated and there will be sometrade-offs to consider in addressing each risk. We hope, however,that sponsors take advantage of these suggestions to improve theirparticipants’ outlook for retirement. After all, the goal of the DCplan is not just accumulation – it is increasingly being understoodas the delivery of post-retirement income,” said Bare.

The Institutional Retirement Income Council is a nonprofit,membership-based organization of industry advisors who arededicated to sharing best practices, informing about legislativeand regulatory issues, and facilitating solutions for plan sponsorsand their participants.