Decumulation is a critical issue for DC plan members, since the decisions they make during that stage can have a significant impact on their income.
“There is a fundamental fact that whatever you do at the time of decumulation, that decision has twice as much effect on your retirement income than all the things you’ve done until you retire,” said John Por, president of the Decumulation Institute, at Osler’s annual client seminar. In fact, he noted, 60 cents of your retirement income is actually earned after you retire.
But is decumulation an area plan sponsors really want to get involved in?
Read: Employers’ decumulation duties remain unclear
Key decision points
Ian McSweeney, partner, pensions & benefits, with Osler, said we need to look at the issue based on three driving factors: achieving retirement income goals; enhancing the value of DC plans; and understanding fiduciary duty (for both the plan sponsor and the administrator).
The first question for plan sponsors to ask is, Why are you offering a DC plan? said Idan Shlesinger, managing partner, DC – pensions & savings plans, with Morneau Shepell. Is it to be competitive with other companies in your industry, or to provide retirement income? Where does your organization fall within the spectrum?
“The approach to retirement income really does inform the entire structure,” he explained. And it’s a decision each company needs to make on its own terms.
“Some organizations certainly seem happy to say goodbye and good luck,” said Shlesinger, adding, “a good understanding of the relationship [with employees] is key.”
Read: Why DC plan sponsors should care about decumulation
Evaluating the options
The default decumulation option for members is purchasing life annuities, said Shlesinger. “The trouble is that they just aren’t very popular,” he explained, noting they’re viewed as expensive and are often associated with a loss of control or ownership of the assets.
At the other end of the spectrum is transferring assets into a life income fund (LIF) or registered retirement income fund (RRIF), where the member still owns the assets and the decision-making responsibility.
A third option is guaranteed minimum withdrawal benefit products, which provide a level of guarantee along with a degree of market participation, Shlesinger added.
Read: Decumulation options to consider
However, he noted, all of these options assume the member is exiting the employer plan—which may not benefit the member.
When moving from a group plan to a retail environment, fees increase significantly. In fact, said Shlesinger, retail fees can reduce the value of assets by up to 30% or shorten the duration of retirement income by five or six years.
The risk/reward tradeoff
Recognizing this impact on the member, some sponsors are taking steps toward maintaining the buying power and protection of the group plan. Where pension legislation allows it, some are offering in-plan payments.
Others—universities such as McGill, for example—are sponsoring group LIFs or RRIFs for retirees. “I certainly believe that is the future of what we should be expecting,” Shlesinger added.
If a plan sponsor does want to get involved in decumulation, there are risks to consider relating to ongoing administration, costs and fiduciary responsibilities, noted McSweeney. But he sees it as one way to help narrow the gap between DB and DC plans in terms of retirement income adequacy.
Even more significant: that involvement could potentially have an impact on implementation of the Ontario Retirement Pension Plan (ORPP), he suggested. All employers without comparable plans will be required to implement the ORPP. However, the scope of comparable plans is currently limited to DB and target benefit arrangements.
Read: What DC plan sponsors need to know about the ORPP
“I wonder if a DC plan with a decumulation strategy would be more of a comparable plan?” McSweeney added.