Choosing a lifetime income guarantee
In order to fulfill your fiduciary duties, it’s important to follow a prudent process when choosing a guaranteed lifetime income investment for your retirement plan.
Follow a prudent process
The key to a prudent process for selecting the insured guarantee of retirement income is to compare the competing products in terms of their designs, features and prices. Let’s focus on the selection of an annuity with guaranteed withdrawal benefits (GWBs). GWBs are an insurance guarantee that, together with the investments in a participant’s account, provides lifetime income to the participant.
With GWBs, the participant initially withdraws money from the investments in his or her account in accordance with a structured withdrawal procedure, but if the account runs out of money—because, for example, of poor returns on the investments or because the participant has a long life—the insurance company steps in and continues the payments for the rest of the participant’s life. If the participant is married and selects the joint-and-survivor option, payments can continue for the life of the spouse, as well.
Assess financial strength and product features
It’s important to look at the financial strength of the insurance company, since the participant’s income is guaranteed well into the future. However, it’s also important to see how a GWB compares to those offered in competing guaranteed withdrawal benefit products. Fees also need to be reasonable and competitive.
Download independent firm Drinker Biddle’s white paper, Fiduciary Process in Evaluating In-plan Guarantees , to learn more about the prudent process they developed for choosing GWBs.
Adding a GWB to a custom portfolio
Some GWB providers charge for the guarantee from the moment the participant places assets in the investment portfolio associated with the guarantee. However, others, like Lincoln, design the guarantee to be incorporated into a target-date fund or portfolio approximately 10 years prior to the targeted retirement date (for example, beginning in 2018 for the 2028 target-date portfolio). While the first scenario provides the guaranteed protection over a potentially longer period, some people question whether younger employees need to incorporate the guarantee (and the associated fee) into their allocation.
The Lincoln Secured Retirement IncomeSM investment option can be included in the glide path of a custom portfolio and phased in over a specified period. For example, 1/10 of the account can be guaranteed in the first year, and only 1/10 of the fee is charged. Then, each year thereafter, the coverage steps up from 10% to 20% to 30%, and so on. The fee for the guarantee is assessed only on the portion of the account that is guaranteed. This allows a participant of any age to select a portfolio that automatically transitions a portion of the portfolio to provide a guaranteed income stream as the participant gets closer to retirement.
Help make retirement income last
Regardless of how a fiduciary decides to assess the design features, these are the types of features that fiduciaries need to understand and consider. Find out how Lincoln Secured Retirement IncomeSM solutions can provide participants with lifetime income. Call our sales desk at 855-533-2170 or read more at LincolnFinancial.com/SRI.