Earlier this year, the Department of Labor and the Treasury put out a Request for Information (RFI) on lifetime income options for retirement plans. Last week was the deadline, and they got some great responses.
My favorite is from the American Academy of Actuaries. Not surprising, since I’m an actuary.
But they pointed out something we’ve been saying for years. It’s very expensive to self-insure your own longevity risk: 30%-50% more, in this example.
That’s been one of the (many) problems with most target-date funds (TDF’s). Their “through” retirement investment allocations (glide path ending at life expectancy, not retirement) are based on the assumption that you’ll stay in the fund for life – and therefore self-insure your own longevity risk. The high equity %’s at retirement (over 50% in most cases) means that, in a down market, you’re unable to convert much to a lifetime income.
That’s fine for people who have their income needs already taken care of. But TDF’s are often used for QDIA’s in 401(k) plans. So we’re taking people who have never gotten around to choosing investments – and putting them in charge of their own investment and longevity risk. Good idea? I don’t think so.
So what’s the solution? Simple: get people in position to convert all or part of their account balances to an income for life. That means converting as you go along, or ramping down to a very low equity exposure at retirement age. Each approach has its pros and cons. More about that in a later post.