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For a quarter of a century, employers in the United States have provided tools their employees are using to accumulate retirement savings.

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Facing Challenges and Creating Solutions for a Generation of Retirees

Guided by the Employee Retirement Income Security Act of 1974, as amended, and empowered by legislation that created defined contribution (DC) workplace retirement savings plans, employers have helped millions of Americans transform the concept of retirement security from a largely government- and employer provided benefit to one that individuals control and realize themselves. In the process, they have helped create the largest generation of individual investors in human history. Now, a massive transition is under way as these investors begin a generational shift from accumulating assets to managing the distribution of income from those assets over the course of their retirement lifetime.

Defining Urgency

Consider for a moment the size of the generation moving into retirement, and one issue is clear: It will take the active participation of all three constituencies— employees, employers, and financial product and service providers—to effectively address what’s next for retirees. In America, 76 million people from the ages of 46 to 64 are approaching retirement today.¹ For many of them, half their adult lives lie ahead of them. The sheer numbers help define a new sense of urgency in assisting with the retirement transition of the “DC generation.”

Appearances Can Be Deceiving

“Compared with their parents at the same age, baby boomers (those born between 1946 and 1964) typically have higher income, are preparing for retirement largely at the same pace, and have accumulated more private wealth,” notes the Congressional Budget Office’s (CBO’s) March 18, 2004, report “The Retirement Prospects of the Baby Boomers.” The report continues, “On the whole, boomers are on track to have higher income in retirement than their parents and appear much less likely to live in poverty after they retire”

While the report paints a favorable picture of the financial wherewithal of those already in or approaching retirement, a recent survey suggests that the lack of a key element—a financial plan— may undercut the financial security of this generation of Americans. Research shows that four out of five people who are either retired or planning to retire soon don’t have any plan for securing lifetime income. The Life Insurance Management and Research Association International found that just 11% of retirees and only 21% of pre-retirees have drafted a formal, written plan that matches their income sources in retirement to their expenses.

Essentially, retirees must change their financial thinking as they transition from full-time jobs and wealth accumulation to retirement and wealth drawdown.

In addition, retirees today will face greater challenges than their parents did. They will be funding and managing retirement largely by themselves. The role Social Security will play in post-employment income replacement is expected to continue to decline. The CBO’s March 18 report states, “That impending wave of retirements has become a source of concern for two reasons; first, the population of retirees will grow much more quickly than the taxpaying workforce, at a time when average benefits per retiree are expected to continue rising. Those developments will place severe and mounting budgetary pressures on the federal government. Second, some researchers have questioned whether many boomers are accumulating enough wealth to pay for an adequate retirement. Not only could inadequate saving leave boomers poorly prepared, but it could compound the government’s budgetary problems by limiting the growth of investment, productivity, and wages (which drive federal revenues).”

The assessment leaves in question whether Social Security will be able to keep up with the growing population of retirees and, perhaps more critically, how government-provided Medicare will be affected by the growing demands on its resources. The budgetary picture is complicated further by the fact that health care costs are rising faster than inflation, and companies are shedding retiree health care benefits.

In light of these realities, Americans will have to understand—better than ever before—the risks they may encounter, and plan more effectively than ever before in order to manage their lifetime income in retirement.

Planning Responses

In the face of these financial planning challenges, Fidelity has studied the issues and is responding to the needs of employers and employees alike. “Fidelity is setting out to create the most comprehensive, cost-effective, easy-to-use suite of planning products and services for retirees and pre-retirees that’s ever been created,” Cynthia Egan, executive vice president, told a gathering of Fidelity corporate clients recently. Egan outlined four key tenets employers and their retirement plan service providers can address together to help meet the lifetime income planning challenge facing today’s retirees and pre-retirees: 1) education, 2) service, 3) income product solutions, and 4) tools and technology.

Fidelity’s research is available to employers in the white paper report “Lifetime Income Planning: America’s Lifetime Income Challenge”. In its research, Fidelity identified five major risks that retirees and pre-retirees face in managing their retirement lifetime income. The risks are:

• Longevity risk—“A longer, healthier life is a good thing, as long as you plan for it,” Egan says. The disconnect occurs when people plan their lifetime retirement income based on life expectancy statistics for the general population, and not on their own personal probability of survival. The Society of Actuaries Annuity 2000 Mortality Table suggests that people should be planning to manage their retirement income—and expenses— for 10 to 15 more years than they currently may expect.

• Inflation risk—The high likelihood of continued inflation makes it imperative to have investments with the potential to beat inflation—especially over the longer retirement that today’s retirees can anticipate. In addition, general inflation may not capture the impact on retirees of rising medical expenses. Numerous studies show that the majority of lifetime medical costs are incurred in the last few years of life, posing additional high costs in the very last stage of retirement.

• Asset allocation risk—Retirees should recognize that they may have sufficient time to benefit from a wise asset allocation strategy and a carefully sequenced plan for asset drawdowns. Effective strategies for asset allocation and distribution can help maximize the long term potential of any given pool of wealth. Adopting a strategy that is too conservative can increase the risk of retirees’ outliving their assets.

• Excess withdrawal risk—The risk of depleting retirement assets increases as withdrawal rates increase, particularly at rates over 4% annually. Retirees need to carefully consider the withdrawal rates they employ, especially in the early years of their retirement. Careful planning can help sustain reasonable higher withdrawal rates later in retirement,  with less risk of depleting assets in their lifetime.

• Health care expense risk—If they are not provided for, health care costs pose very real risks of throwing lifetime income plans off track, particularly in light of health care inflation rates today. Most retirement experts now believe that health insurance itself has become one of the core elements of current retirement security, along with pensions, personal savings, and Social Security.
  Lifetime planning services

Having identified the risks, Fidelity’s education, service, product, tools, and technology solutions focus on:

• Educating employees and retirees to help them understand the risks they face

• Giving people an accurate planning baseline for lifetime incomes

• Teaching employees and retirees how to manage risk by providing the information and tools they will need to create income sources they won’t outlive

The Fidelity Retirement Income Advantage^TM offering marshals Fidelity’s organizational experience and expertise in financial planning, investing, and income management to create a set of services designed to help people “live for the retirement they have worked for and to give them the confidence they will have enough money to last their lifetime,” Egan says. “With Fidelity Retirement Income Advantage, our customers have access to products, services, and resources that are comprehensive, and that can enable investors to build, monitor, and maintain an income plan for managing their financial lives in retirement.” The elements of the program include:

• Educational workshops hosted on site to reach pre-retirees and, as appropriate, off site to reach retireees as well.

• Educational materials and online resources at Fidelity NetBenefits^® and Fidelity.com,^® and seminars

• Income planning consultations with specially trained representatives, either on the phone or face to face in local Fidelity Investor Centers

• A suite of planning management and monitoring tools, many accessible through NetBenefits and Fidelity.com, including Fidelity Retirement Income Manager Account, a specialized retirement income account that will serve as “command central” for retirees to manage their assets and income in retirement.

Finding Solutions

During the fourth quarter of 2003 and throughout 2004, 10 clients that sponsor workplace retirement savings plans for which Fidelity provides administrative recordkeeping services have piloted Retirement Income Advantage with their employees. At these companies, where employers are committed to helping their retirees and employees ensure retirement security, Fidelity is conducting its “Five Golden Rules of Retirement Income Planning” seminar. Seminar attendees learn that a more successful retirement begins with 1) planning, 2) managing risks, 3) aligning resources and expenses, 4) customizing an income strategy, and 5) activating and managing the plan to stay on track. Most participants in workplace retirement savings plans for which Fidelity provides administrative recordkeeping services will find the Retirement Income Planning tool at NetBenefits. Here, employees and retirees will find a gateway to an online retirement income planner as well as a tool that will provide a retirement income “quick check” or “full income review.”

Making Sure

Ron Wyse, vice president of Benefits at Harris Corporation, explains the company’s decision to pilot Fidelity Retirement Income Advantage services with its employees. “Making sure this generation of Americans effectively manages retirement income over the course of their retirement lifetime is the next financial challenge,” he says. “Harris recognizes the responsibility to help employees and retirees meet the challenge and succeed.”

While the pilot is under way, specific resources offered through Fidelity Retirement Income Advantage are available to participants in workplace retirement savings plans for which Fidelity provides administrative recordkeeping services, depending on certain requirements and qualifications.

Currently, most employees can access the Retirement Income Planner on NetBenefits for an in-depth analysis of their income planning needs. All participants can call 1-800-887-4015 to speak with specially trained Retirement Specialists; they can begin the retirement planning process if appropriate. They also can ask for “A Fidelity Perspective: Planning for Retirement Income,” a consumer-focused white paper report. Throughout 2004 and into 2005, Retirement Income Advantage educational materials, communications programs, and workshops are being integrated into Fidelity’s overall communications and education programs for workplace retirement savings plans.

Contact Atlantic Financial

Atlantic Financial can setup new 401k plans or administer existing 401k plans.  We can also help your company serve former employees by transferring them out of your plan and into their own IRA account with an IRA Rollover - it's better for the participants and can save your company money. 

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401k Plan | 401k Plan Services | 401k Plan Investment Options | 401k Plan Setup