In-Plan Income Has Arrived (and It's Coming for Your Rollovers)

What You Need to Know

Target date fund investors are amassing large nest eggs with no clue how to turn them into retirement income, Annexus Retirement Solutions’ Dave Paulsen says.
He says his firm’s new target date fund series offers one solution to that problem.
Annexus is not the only firm working to help workers create income streams within their retirement plans.

State Street Global Advisors grabbed investment industry headlines in April with the launch of a new series of retirement-focused funds developed alongside Global Trust Co. and Annexus Retirement Solutions.

In revealing their collaboration, leaders at the firms said the target date fund series is designed to deliver “automatic retirement income” for mass-market investors in workplace defined contribution retirement plans. The TDFs are meant to be used as a default investment in any 401(k) plan, and they target a 6% annual income rate at income activation.

In a new conversation with ThinkAdvisor, Dave Paulsen, chief distribution officer for Annexus Retirement Solutions, spoke in depth about the new product, and he also called on wealth advisors to embrace the central role it can play in helping to resolve what he begrudgingly calls the “decumulation problem.”

Paulsen said the typical wealth manager might not see the launch of a new TDF series designed for default use as an investment option in 401(k) plans as an important piece of news for their practice, but that perspective misses a key emerging trend: the convergence of wealth and retirement.

As Paulsen and others warn, the growing feasibility of “in-plan” retirement income could soon begin to shift the prevailing logic that says retirees are generally better off rolling their nest egg onto a private brokerage platform serviced by an advisor.

If an investor can get an effective retirement income solution in their trusted 401(k) account at a very affordable price while also enjoying ongoing fiduciary monitoring, why would they roll over, especially if the fees will be higher?

Ultimately, Paulsen says, wealth advisors have a lot at stake when it comes to the ongoing development and growing sophistication of retirement income-focused services within DC plans. Advisors who embrace the world of DC plan income will position themselves well to compete in an evolving landscape, he argues, while those who ignore the topic risk overlooking a key new source of competition that could eventually eat into their wealth practices’ substantial rollover-derived revenue.

Where TDFs Fall Short

“I really don’t like the ‘decumulation’ word, to be honest, but it does point to a really big financial challenge we are facing today in America,” Paulsen says. “The generational shift away from pensions and towards DC plans has left people on their own when it comes to income planning. Even when they have saved a lot and been quite successful, they don’t know what to do next.”

As DC plans rapidly became the normal retirement savings option for middle-class and mass-affluent working Americans, Paulsen explains, the investment management and retirement plan industries came together to create the basic target date fund vehicle. Paulsen says first-generation TDFs have been successful in helping individual investors automatically improve their portfolio allocations and generate substantial savings over time, but another step forward is now required.

That is, the original flavors of TDFs have not traditionally included a retirement income component, and that is now becoming a problem as millions of Americans approach and enter retirement with much of their net worth held within 401(k)s. Many simply have no idea how to manage their income and spending after a lifetime of steady paychecks.

While there is always the option to roll over the assets to a brokerage platform, many Americans have relatively modest account balances that won’t qualify them for high-touch service from advisors. As such, they have relatively little chance of crafting an efficient income plan.

“It’s only been in the last three years or so that the retirement plan industry has decided it has to tackle this problem,” Paulsen says. “We have come to embrace the fact that we have to make sure the participant understands that their nest egg is not just a number. It has to be turned into retirement income.”

According to Paulsen, this is not just a challenge facing people of modest means. Simply put, many people have high six-figure or even seven-figure balances in their 401(k) plans, and while such people would normally make very attractive rollover clients for wealth advisors, they may not feel the need to move their money if their employer presents them with a viable income option.

The Intricacies of Income

In Paulsen’s view, solving the income challenge is important, but it’s also hard.