The decline in defined employee benefit plans and the rise in defined contribution plans – combined with increasing longevity – is creating growing risk among baby boomer employees regarding their retirement benefits.
As retirement benefits are redesigned for today’s retirees, it is unclear whether employer programs can support long-term financial security, according to a report from The Conference Board. The report is based on presentations and discussions by senior human resource executives attending a special Pensions and Retirement conference held by The Conference Board.
Legislation, including the Pension Protection Act of 2006, liberalized requirements for defined contribution plans. Many experts disagree over whether the new rules for defined benefit plans will help stabilize the system or encourage more companies to curtail their plans.
The risk is twofold. The first concern is that employees will outlive their retirement income and will experience a significant decline in their standard of living as they move from the accumulation phase. Many people are underestimating their life expectancy and overestimating how much money they can draw from savings. Employees are facing new responsibilities for managing retirement assets, distribution options and the payout period, and many are unable to manage the process effectively.
The other danger is that employees are investing more than they should in equities, due in part to the limited options for their defined contribution monies, inflation and market volatility. Even though many employers are using target fund dates, some experts believe that these funds – which have been endorsed by the Department of Labor and the Employee Benefits Security Administration for default investment options – are generally too risky for the average employee.
Today’s aging baby boomers are the best educated, healthiest and longest-living group to ever enter retirement. When surveyed, 7 out of 10 people in this population reported that they want to continue working in retirement, according to Anna Rappaport, senior fellow on pensions and retirement for The Conference Board, and an author of the report. Given these new parameters, new definitions and innovative employment options must be created for this phase of life.
One option to make retirement more secure is to create solutions that provide lifetime income, such as inexpensive and flexible annuities. Offering employees in-plan opportunities to purchase income annuities with their defined contribution assets can also provide lifetime income. Programs that allow a rollover into IRAs with institutional annuity rate purchases are another option.