The Advice Challenge

By Mark Shemtob

Retirement Section News, April 2025

In recent years, there has been an increasing focus on encouraging sponsors of 401(k) and other defined contribution plans to provide retirement income options. This initiative has received support from both the government as well as retirement security experts; however, only a small percentage of employers have adopted this change thus far. Employers have expressed concerns regarding additional fiduciary liability and associated costs. Another challenge lies in assisting retirees to make informed decisions among the various available retirement income options. The traditional defined benefit plan, which has largely been replaced by the 401(k) plan, provided a retirement income, with the retiree’s decision typically limited to whether to accept a reduced income in exchange for a death benefit for a beneficiary.

A recent MFS white paper titled “The Retirement Income Dilemma” noted that 72% of surveyed plan participants would welcome access to plan-provided advice, with an additional 22% indicating they may be interested in help. The type of advice can vary, including in-person (or video), online calculators, financial publications/videos/podcasts, and robo-advice. Only 6% of respondents indicated they were not interested in any plan-provided advice, with some already having their own outside advisors. The majority who desired in-person (or video) advice were those nearing retirement ages and facing the challenge of creating lifetime income.

One conclusion in the MFS paper is that each participant is unique, based on their financial situation, needs, and goals. There is no one-size-fits-all retirement income option; a variety of options should be considered to satisfy a range of personal situations and goals. Among the most basic components of retirement income are fixed income annuities (which provide guaranteed fixed lifetime income for a single premium payment) and investment account drawdowns (which provide flexibility and potentially greater income, but with added risk). For retirees to make a well-informed decision of how much of each component to select, they will need access to advice that is personal, unbiased, and cost-effective. This is especially true when deciding to buy an annuity (which is non-reversible). Some key considerations include:

1. Amount of retirement savings: The more an individual has accumulated in their nest egg, the less likely they are to need to purchase an annuity to maintain their lifestyle. With sufficient assets (relative to living expenses) a retiree can expect to create an investment-based income that will last for an unknown longevity.

2. Home equity: Retirees who own their home outright or have a very small mortgage can call upon that asset late in retirement to provide an income if needed through a reverse mortgage. Thus, this can be a reason not to annuitize.

3. Social Security benefit level. For many Americans, Social Security is the most important component of their retirement income. It provides a safe inflation-adjusted income. However, for most retirees, Social Security alone will not be sufficient to fund all fixed expenses. Thus, depending on the Social Security income level and the size of one’s nest egg, it may be advisable to supplement with guaranteed income through an annuity.

4. Health: Those in poor health generally are not good candidates for annuities since those that live the longest reap the greatest overall benefit by receiving payments for a longer time period.

5. Marital status: In the case of a couple sharing assets to finance retirement, it is important to look at the couple’s overall nest egg and other retirement income sources. How the death of one partner impacts the other might lead to consideration of an annuity purchase that would provide benefits to the surviving retiree.

6. Existing pension or annuity: To the extent that a retiree has a pension or previously purchased annuity in place that provides a guaranteed income, the need to convert any more of one’s nest egg to an annuity is likely reduced.

7. Fixed expenses: Advisors generally recommend that retirees have enough guaranteed income (Social Security, pensions, and annuities) to cover all fixed expenses. An annuity purchase may be required to follow this recommendation.

8. Bequest motives: Retirees who focus on ensuring that heirs receive inheritances tend to shy away from annuities that stop paying benefits at death. However, it should be recognized that annuitization could improve bequest goals if the retiree lives long enough and thus benefits from many years of annuity payments.

9. Investment knowledge and risk level: Some retirees are comfortable with a volatile investment portfolio. Annuities provide an alternative to this for retirees who wish to limit investment risk.

10. Current annuity pricing levels: Annuity prices change with economic factors, primarily interest rates. Purchases are most attractive when rates are higher. Pricing at the time of purchase may be considered in the decision to purchase an annuity.

The above issues need to be considered in combination with each other (as they may not be independent) in making decisions on how best to proceed. Having access to advice can add significant value especially when deciding upon the extent (if at all) of how one’s nest egg should be split between investments and annuities. The most cost-effective way to provide advice is likely through online education accompanied by modeling tools to help retirees appreciate alternative scenarios. However, this may not be sufficient for many retirees that would benefit from more personalized expert advice.

Recordkeepers, or the plan investment advisors, are likely the best positioned to provide this valuable service. However, there may be a question as to how unbiased some plan investment advisors might be since their income levels may be dependent on the decisions made by the retiree. Pure recordkeepers might be more objective, however, to date few recordkeepers have the capacity to provide the expert advisory service in understanding the above issues and how they impact a retiree’s specific situation. In addition, how would this service be paid for? It would be appropriate to charge the retiree for this advice should they wish to take advantage of it. However, the fee would need to be reasonable enough as to make it affordable to most retirees.

The current and growing emphasis on plan-provided retirement income is a positive development. However, for it to be of value for many retirees, it will need to be accompanied by cost-effective, unbiased personal advice.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.

Mark Shemtob, FSA, MAAA, is an active volunteer within the actuarial profession serving on several retirement security-focused committees, and is also a Certified Financial Planner. Mark is currently a director of the Institutional Retirement Income Council. Mark can be contacted at markeaasa@yahoo.com.