19 May 2022

Personalized Advisory Services Essential for Retirement Planning

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Investors put a premium on different services offered by their advisors, depending on their requirements.

For 57% of retirement investors, retirement income planning is among the most important services they want from their advisors, according to a report in the January issue of Cerulli Edge.

Concerns about decumulation and income planning are emerging because of rising health care expenses, Cerulli research found. Forty-five percent of retirees in the study consistently cite these costs as the top source of stress.

Expenses such as long-term care are significant and can vary substantially depending on the level of service offered, Cerulli said.

“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,” Shawn O’Brien, a Cerulli senior analyst, said in a statement.

Forty percent of retirees also worried about outliving retirement assets, prompting some plan fiduciaries to take a holistic look at their investment lineup and solutions to hedge against longevity risk, according to the report.

As plan sponsors continue to favor defined contribution plans over defined benefit ones, ownership of longevity risk has gradually shifted from the employer to the participant.

“Retirement savers will increasingly assume the risk of outliving their income producing assets in retirement,” O’Brien said. “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.”

The report noted that with the passage of the Setting Every Community Up for Retirement Enhancement Act in 2019, the industry has paid more attention to annuity products. As broader discussions of retirement income in the DC plan market occurs, the benefits these products provide may offer a viable solution for retirement investors, it said.

Cerulli said advisors in a managed account are well positioned to help participants navigate decisions related to annuitization. The firm 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,” O’Brien said.

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