Tip of the Week: Changing Investment Philosophies from Accumulation to Distribution

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.

Following is a tip concerning changing investment philosophies from the accumulation period to the distribution period.

Participants who are nearing the end of their working years and are getting ready to enter the distribution phase are likely to be interested in products focused on better distribution options. Sometimes, vendors that offered competitive accumulation products may not be the same vendors that offer the best distribution options. Examples of distribution features desired by retiring participants include:

• Best possible annuity payout factors. If participants conclude that annuitization of retirement accounts best meets their needs, it is important that they find the highest possible interest rates for the payouts and a variety of options to fit the situation. Some of those options might include a cost of living adjustment built into the payments or a variable payout vs. a fixed one. There are many differences among annuity providers in determining the income stream as well as the annuitization options offered.
• Flexibility in the distribution product. The majority of participants generally prefer not to annuitize their account values (although this preference appears to be changing due to new concerns about the income streams from their defined benefit plans and Social Security). They often favor preserving principal while making withdrawals as needed with assurances that required minimum distributions (RMDs) will be properly handled by the provider. This includes accurate calculations of the RMD and automatic payments in a timely manner.
• Preservation of tax deferral. Many participants want to preserve tax-deferred values as long as possible and receive required distributions only as required under the law. For example, participants in IRAs may be able to defer RMDs past age 70½ by rolling over their IRA account values into a 403(b) or a 457(b) governmental plan (provided that the 403(b) and 457(b) plans accept rollovers into the plan) to delay distributions until the year they actually stop working for the employer. Participants in 457(b) governmental plans have new rollover opportunities at severance of employment to defer taxes and gain control of those values. Pension portability provides an opportunity to use the varying rules applicable to different types of plans to meet individual goals.
• Support throughout the distribution process. Participants need calculations and distributions of the amounts necessary to satisfy RMD requirements, as well as calculations and distributions to satisfy the substantially equal payments option under Internal Revenue Code Section 72(t). Perhaps the participant’s current vendor does not provide that level of support.