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Decumulation: The next critical frontier in retirement planning

Kathy Bush is chair of the National Policy Committee, Association of Canadian Pension Management (ACPM).

You have been and may still be a contributor to a defined-contribution plan or group RRSP. Your savings have grown as your employer, through an external expert, has managed your investment portfolio. Your retirement savings will be used for retirement spending. What could possibly go wrong?

The answer, unfortunately, is too much.

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Upon your retirement, you will have to convert your accumulated savings into retirement income and the management of those savings will shift from your employer to yourself. You will have the responsibilities of investment options and returns, the estimation of their own longevity and, most importantly, ensuring that you will have enough retirement money.

Read more: How to pay yourself in retirement: It's a science

The complexity of managing retirement investments is something that many retirees cannot handle. According to a U.S. study, titled The Effects of Conflicted Investment Advice on Retirement Savings, it has been suggested that high costs, poor decisions and conflicted advice can produce retirement incomes significantly less than if institutional fees, smart defaults and fiduciary oversight were applied.

This is a problem for retirees, but also for the economy and society at large. Within the next decade, nearly one person in four in the labour force could be 55 years of age or older, and a significant portion of the population will be transitioning to retirement. Looking at defined-contribution plans only, there are more than one million plan members holding an estimated $67-billion in assets. Pension record keepers estimate that 80 per cent to 90 per cent of Canadian retirement savings, outside of defined-benefit pension plans, will be converted to retirement income through individual plans.

How can you reduce your risk? There are individual decumulation options such as annuities, but retirees may find them inflexible, expensive and subject to the fluctuation of interest rates and inflation. Alternately, there are individual life income funds (LIFs) and registered retirement income funds (RRIFs) that act like CAP (capital accumulation plan) arrangements in reverse and provide payments to a retiree over time, but they can carry risk related to longevity and investment return assumptions. But another solution may be around the corner.

The Association of Canadian Pension Management (ACPM) believes that CAP sponsors and regulators, service providers and governments need to work together on another solution. There are options and processes in Australia, Britain and the United States that address some of these issues that leave our current options incomplete.

As a start, we need to offer retirement-plan designs that provide for managed withdrawals, longevity protection, access to lump sums, inflation protection and default options. They should also include some of the features that help retirees make investment decisions in their savings phase such as limited choice, low-cost, suitable defaults, auto-features and clear communications. These designs should guide, not mandate, retiree decisions. Group options designed with these options would produce better outcomes.

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While current retirement-income options through advisers provide individual services, freedom and flexibility, they can be expensive. In addition, most employers are reluctant to offer default decumulation options or retiree assistance without liability protection. Improving the disclosure of costs and offering employers some liability protection would provide retirees with better choices and improve outcomes.

Group plans would permit retirees to access familiar funds and tools, pool retirement risks and capture the economies of scale. But they must also be designed and supported by a regulatory framework that recognizes: 1) retirees often have other assets beyond government and employer-sponsored retirement savings such as houses, inheritances and personal savings and 2) that longevity protection is also required.

Our government and financial-services industry have done a tremendous job expanding the use and success of retirement-savings plans. Where we must improve, however, is in the decumulation of those savings. Now is the time for joint action before a small problem becomes a much bigger problem over the next decade.

Video: Money Monitor: What to be wary of when borrowing in retirement (The Canadian Press)
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