A new Institutional Retirement Income Council (IRIC) paper, “Retirement Income Reimagined – How Systematic Withdrawals Are Reshaping DC Plans”, examines the rapidly growing inventory of systematic withdrawals in-plan retirement income options.
“Systematic withdrawals represent powerful and flexible retirement income strategies within DC plans, with the understanding that the strategies have a level of variability and do not provide guaranteed income,” said Kevin Crain, IRIC’s executive director. “By leveraging these structured withdrawal methods, retirees can create sustainable and tax-efficient income streams that adapt to their needs throughout retirement. As the retirement landscape evolves, embracing in-plan strategies like systematic withdrawals offers retirees a practical, adaptable way to manage their retirement income, ensuring financial security and peace of mind in their golden years.”
The IRIC paper also explores various approaches to how systematic withdrawals are utilized in retirement, including:
- Self-determined periodic distributions (simple systematic withdrawal)
- Managed accounts with a retirement income feature
- Target date funds with a built-in retirement income payment feature
These options utilize periodic distribution functionality as the source for retirement income payments—non-annuity payment structures. The paper also explores how these approaches are utilized in retirement plans, as well as required minimum distributions.
Q: How is retirement planning evolving as baby boomers leave the workforce?
A: A critical evolution needed is for companies to enhance their financial wellness programs to offer more robust pre-retiree education and planning tools. Providing that to employees who still have years to go before retirement (at age 50 or age 55). So, they have time to plan and take appropriate actions to maximize savings and be ready for day one of retirement. An important component of the pre-retiree program is education about Social Security and Medicare. What the programs offers and when/what decisions individuals need to make. Providing integrated retirement income planning tools that participants can use to project income with the ability to model Social Security elections and DC plan balances. Most workers do not understand Social Security and Medicare. And both programs are critical components for a successful retirement.
Q. How are systematic withdrawals reshaping DC plans?
A: Systematic withdrawals are a vibrant solution to provide orderly retirement income to DC plan participants. It is an alternative retirement income distribution option if participants do not want to elect annuities (or if the plan does not offer annuities). Systematic withdrawals functionality can be integrated into broader investment options to offer participants an “easy-to-use” portfolio management approach for the accumulation and decumulation stages in DC plans.
Q. How can plan sponsors incorporate systematic withdrawals into their DC retirement plans?
A: Recent evolution for in-plan retirement income options has been the packaging of systematic withdrawals functionality in target date funds and managed accounts. target date funds and managed accounts with a retirement paycheck feature using systematic withdrawals, is an investment strategy that a plan participant can use throughout their working career and post-retirement. Plan Sponsors can also offer a combination of a retirement conservative investment portfolio combined with a retirement paycheck periodic withdrawal feature. The retirement paycheck feature can pay out DC plan balances using a fixed dollar amount or fixed percentage approach.
Q. How are required minimum distributions becoming a systematic withdrawal strategy?
Required minimum distributions have been a long-standing federal mandated retirement income withdrawal strategy in DC plans. Recent legislation recognized the advancements in longevity (people living longer) by raising the initial age that RMDs had to commence for participants. RMDs have a set payout formula for periodic payment of plan balances.
RMDs offer a retirement income strategy for retirees that do not need DC plan income early in retirement. RMDs can be part of a broader integrated retirement income strategy combining with Social Security, pensions, and other asset pools. Because RMDs commence at a later age for participants, tax planning is important to manage the impact for a participant’s tax bracket.