Plan Design Blog

Stable Retirement Income Is a Process, Not One & Done

21 May 2021

4 min read

Jennifer DeLong| Managing Director, Head—Defined Contribution; President—AllianceBernstein Trust Company

Andrew Stumacher| Managing Director—Custom Defined Contribution Solutions

Howard Li, CFA| Senior Research Analyst—Multi-Asset Solutions

As people live longer, they need their retirement income to last longer, too. Plan sponsors are increasingly seeking solutions that provide enough retirement income for the most participants, but powerful forces can sidetrack progress toward that goal. Even if participants make years of steady contributions and maintain thoughtful asset allocations, an ill-timed market downturn or change in interest rates when approaching retirement can be devastating.

But there’s an effective solution to these pitfalls. It starts with securing a guaranteed income stream earlier—and systematically—while still working, and not shifting the bulk of savings to a purchase at a single point in time on the threshold of retirement.

Avoiding (Or Embracing) Risk with the Help of Time

People can’t predict market or interest-rate movements, but they can plan and protect against uncertainties. The goal is to minimize the volatility of future income, and the key is to secure it by purchasing guaranteed income a little at a time.

Steadily buying guaranteed income, ideally starting 10 to 15 years before retirement, does three important things. First, it gradually ensures an income level by locking it in, which eliminates exposure to a narrow set of market conditions (especially poor ones). Next, it adds downside protection, which allows for more equity exposure—and growth potential—closer to retirement, when most investors typically seek to reduce equities. Finally, it delivers real-time feedback to participants well before retirement, so they have the time to plan and adjust.

Retirement assets also face sequence-of-returns risk, when account balances suffer losses in participants’ final working years. Without a secured income, sequence risk is magnified by point-in-time risk, which leaves behind a smaller stake to buy guaranteed retirement income at the pivotal moment right as retirement arrives.

Point-in-time risk was especially painful for investors amid the more iconic market downturns, such as the global financial crisis and most recently during the early months of the COVID-19 pandemic. As markets dropped, they took retirement savings down with them, leaving a lot less participant buying power while guaranteed rates dropped, too—lowering guaranteed income for life (Display).

Out-of-Favor Markets Can Alter Retirement Income Paths

Account value and guaranteed income are sharply lower if retirement follows a sudden market drop, like the one in early 2020.

*Based on the average of multiple insurer-backed guaranteed lifetime income withdrawal rates, a portfolio of 50/50 stocks and bonds and the full account value is used to purchase a guaranteed benefit at retirement.
Source: MSCI and AllianceBernstein (AB)

Avoiding the Interest-Rate Timing Game

Interest rates are the cornerstone of just about everyone’s income calculus, and they’re alarmingly unpredictable. By purchasing guaranteed income systematically—across different rate environments—participants avoid risking a lower rate (and lower income), which frequently happens in a one-and-done purchase. That risk is made worse when lower guaranteed income rates correspond with a sell-off in asset prices.

Systematic purchasing of guaranteed income works much like dollar cost averaging (DCA), which entails buying investments at different prices gradually over time. In the case of retirement income, participants purchase insurer-backed income guarantees at different prevailing rates over time. The advantage: income for life is based on a cumulative rate, rather than rates at a single point (Display).

Accumulating over Time Improves Income Consistency as Rates Fluctuate

Steadily building guaranteed income through different rate climates can reduce exposure to a low prevailing rate at retirement.

As of October 31, 2020
Based on quarterly benefit rate quotes from plan insurers.
Source: AllianceBernstein (AB)

‘Steady as You Go’ Also Builds Trust

Protecting retirement income from market and interest rate setbacks is a strong start, but the nature of buying insurer-backed income offers benefits, too.

For example, buying in to guaranteed income over time also builds trust and confidence. Emotion-based biases seem to get swept away: for example, a 5% annual allocation to gradually buy a guaranteed income solution may feel more psychologically and financially feasible than the prospect of cashing out and annuitizing a full account balance at 65.

It also helps that the buying-in process rings familiar with other programs participants use. Many participants rely on periodic investing into their DC plan, and they trust how target-date portfolios slowly de-risk as they approach retirement. Guaranteed income solutions, especially those offered as in-plan QDIAs, are aligned at heart with these other time-tested savings regimens.

For a worry-free retirement, we believe that planning guaranteed income for life makes sense. Methodically securing that income during the working years is even more prudent, because it resolves common tail risks: experiencing poor markets near or at retirement and “living too long.” With these problems in check, and depending on the type of income option, other impactful issues can be addressed, like preserving retirement account value upon a retiree’s death or benefiting from market gains.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Jennifer DeLong

Jennifer DeLong is a Senior Vice President, Managing Director and Head of Defined Contribution, responsible for leading AB’s defined contribution business in North America. She oversees product management and development, marketing, participant communications, and client services for the firm’s institutional custom target-date and lifetime income solution clients. Additionally, DeLong is responsible for firm’s Collective Investment Trust business and is President of the AllianceBernstein Trust Company. Since joining AB in 1999, she has held various senior client relationship management, product management and marketing roles, all primarily focused on defined contribution, 529 college savings plans and sub-advisory insurance services for both institutional and retail clients. Before joining the firm, DeLong worked in various sales, marketing and client relationship management roles for both small and mega-sized defined contribution plans. She holds a BS in business management with a minor in international business from The College of New Jersey, as well as FINRA Series 6 and 63 licenses. Location: New York

Andrew Stumacher

Andrew Stumacher is a Senior Vice President and Managing Director for AB’s Customized Defined Contribution Solutions. He is responsible for developing, implementing and driving the growth of custom target-date, model portfolio and retirement income strategies for the large and mega-size institutional plan market, in which AB serves as one of the largest managers in the US. Stumacher works in close collaboration with plan sponsors, consultants and external business partners to develop innovative and flexible products to improve outcomes for DC plans and participants. He joined the firm in 2004 as a marketing analyst, focusing on strategy and development for new institutional products. From 2011 to 2017, Stumacher managed the integration of AB’s DC products with recordkeepers, trustees, custodians, insurers and investment managers as the DC partner relationship officer. He holds a BS in applied economics and management from Cornell University and an MBA from Wagner College as well as the Certified Annuity Specialist™ designation from the Institute of Business & Finance. Location: New York

Howard Li, CFA

Howard Li is a Vice President and Senior Research Analyst for AB’s Multi-Asset Solutions division. He works in the US Defined Contribution Research and Investment Management team, where he is responsible for custom glide path construction, asset allocation and portfolio management of target-date solutions for US defined contribution (DC) plans. Li works with plan sponsors to develop custom glide path strategies that are tailored to DC plan sponsors’ objectives and participants’ demographics. He joined the firm in 2006 as a quantitative research analyst. Since 2008, Li has focused his research on asset allocation and investment management of custom target-date and lifetime income strategies. He holds an MSc in computer science from Boston University and an MBA in finance and economics from Columbia Business School. Li is a CFA charterholder. Location: New York

This is a marketing communication. This information is provided by AllianceBernstein Limited, 60 London Wall, London, EC2M 5SJ. Registered in England, No. 2551144. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA - Reference Number 147956). It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed are based on our internal forecasts and should not be relied upon as an indication of future market performance. The value of investments in any of the Funds can go down as well as up and investors may not get back the full amount invested. Past performance does not guarantee future results. This information is directed at Professional Clients only and is not intended for public use.

Stable Retirement Income Is a Process, Not One & Done

Avoiding (Or Embracing) Risk with the Help of Time

Avoiding the Interest-Rate Timing Game

‘Steady as You Go’ Also Builds Trust

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