Why Personalized Advisory Services Are Essential for Retirees

Ted Godbout

As plan sponsors consider design changes to make their plans more effective decumulation vehicles, a new paper by Cerulli argues that there is no one-size-fits-all solution and that managed account advisors are well positioned to help.

“Rather, solving for decumulation often calls for a personalized experience that includes crafting a comprehensive financial plan, and an investment and withdrawal strategy designed to meet the unique spending requirements and long-term objectives of retirement investors,” the firm states in its latest Cerulli Edge—U.S. Asset and Wealth Management Edition. 

And with retirement investors considering retirement income planning (57%) as one of the most important services offered by advisors, managed account providers are well positioned to help participants “make prudent, informed decisions” related to decumulation, the paper contends.   

Holistic Strategies

For many, concerns regarding decumulation and income planning are surfacing because of rising healthcare expenses, as 45% of retirees consistently cite health care costs as their top stressor, Cerulli notes. Moreover, expenses such as long-term care are significant and can vary substantially depending on the level of service offered. 

“The importance of planning for health care costs in retirement cannot be understated and advisors, both in plan and out of plan, should account for medical expenses within the holistic, long-term financial strategies they construct for their clients,” says Shawn O’Brien, senior analyst with Cerulli. 

A full 40% of retirees also express concerns of outliving retirement assets, prompting some plan fiduciaries to take a holistic look at their investment lineup and solutions to hedge against longevity risk. 

As such, providers can enhance the value proposition of their retirement income and planning solutions by offering advice that extends beyond traditional portfolio management, such as when to claim Social Security, how and when to withdraw money from various investment accounts during retirement, and how to plan and save for future health care costs. Cerulli asserts these are inherently personal challenges and are best addressed within a holistic, comprehensive retirement planning context.

Tax-Efficient Withdrawal Strategies

One way that advisors—from digital advice platforms to traditional wealth managers—can deliver significant value to their retiree clients is by helping them construct tax-efficient investment and withdrawal strategies. And while it’s important to ensure that clients satisfy their required minimum distributions (RMDs), it should only be one facet of a tax-efficient withdrawal strategy, the paper contends.

“More sophisticated retirement income solutions take a myriad of factors into account such as the retirees’ annual spending requirements, Social Security income, federal and state income tax brackets, and any cross-generational investment objectives (i.e., do they wish to bequeath assets?) to craft a withdrawal strategy that effectively defers taxes and minimizes the tax liability for the investor,” the paper explains. 

Still, while many advisors and retirement income solutions—such as managed account programs—offer advice related to Social Security, tax-efficient withdrawals and healthcare expenses, Cerulli suggests that the efficacy of these features seemingly varies across providers. 

Lifetime Income Solutions

Turning to decumulation strategies, Cerulli notes that with the passage of the SECURE Act in 2019, increased industry attention has been paid to lifetime income products. And as broader discussions of retirement income in the DC market occurs, the benefits these products provide may offer a viable solution for retirement investors, the paper notes. 

“Retirement savers will increasingly assume the risk of outliving their income producing assets in retirement,” says O’Brien. “Future retiree cohorts, who are less likely to have accrued DB plan benefits, are more likely to benefit from the longevity hedging benefits of an annuity allocation,” he adds. 

As such, Cerulli suggests that advisors in a managed account are well poised to help participants navigate decisions related to annuitization and maintains that in-plan annuities are best implemented as a component of a professionally managed solution, such as a target-date fund or managed account, rather than as a stand-alone option on a plan’s core menu. 

“While incorporating annuitization options within target-date funds can potentially make these products more effective retirement income solutions, annuitization decisions are decidedly complex and should take into account the investor’s risk tolerance, liquidity requirements, and investable asset balance, among other factors,” says O’ Brien.

At the same time, however, some recordkeepers note that portability remains a concern when it comes to offering an in-plan annuity. Providers and fiduciaries looking to offer an in-plan annuity—whether through their TDF or managed account offering—should consider engaging with a middleware provider that can help track and reconcile annuity contracts between the participant, recordkeeper and insurer, Cerulli advises. 

What’s more, for many retirement investors, annuitizing a portion of their retirement savings may not be in their best interest, the paper emphasizes. According to Cerulli, one managed account provider explained that, in some cases, participants are not using their 401(k) for retirement income at all, as some are their 401(k) for a bequest or viewing it as a rainy-day fund. “One big reason is that a good chunk of these participants has some sort of pension and even if that pension only gives them ten or twenty thousand per year, which, coupled with their Social Security income, is material in covering their basic spending needs,” the provider was quoted as saying.