While retirement income planning has been helped by reforms such as auto 401(k) enrollment, AllianceBernstein says in a new report that advisors and their clients need to use insurance and other strategies to ensure sustainable retirement income.

While legislation such as the SECURE Act and SECURE 2.0 made it easier for plan participants to invest in their respective 401(k) plans, U.S. workers still struggle to save enough money to last through retirement, the company says in a new research paper that offers a framework for sustainable income.

As lifespans increase, retirement savings need to keep up. This necessitates the need to have a retirement income stream and an entirely new way of looking at defined contribution plans including 401(k) plans, according to the paper.

“What we’re seeing in the defined contribution space is an evolution of retirement plans,” said Jennifer DeLong, managing director and head of defined contribution at AllianceBernstein. “Many plan sponsors are trying to take their plans to the next step [and] to think of them not just as a retirement savings plan, but as an overall retirement income program.”

To assist plan sponsors and advisors, the firm unveiled “Leveling the Retirement Income Playing Field: A Comprehensive Framework for Evaluating Diverse Lifetime Income Solutions.” It is a comprehensive report that lays out multiple frameworks for advisors and plan sponsors to implement when establishing retirement income for investors.

“To create a level playing field, we’ve developed a framework to help plan sponsors compare different methods for delivering sustainable income throughout retirement,” the report read. 

When incorporating the frameworks, the report points out that advisors and plan sponsors should look at retirement income from the perspective of the individual client.

“They spend their time focusing on the averages and to do that you could miss some of the individual risks that participants are subject to,” said Christopher Nikolich, head of glide path strategies at AllianceBernstein and co-author of the report. “Plan sponsors need to think of each and every one of us.”

There are a variety of factors that go into a person’s lifespan, including their lifestyle, medical history, family history and others. The advisor or plan sponsor must tailor the plan to meet that need, according to Nikolich.

One aspect of that lifespan is determining the costs an individual will incur during their lifetime. The report measures the total cost of lifetime income solutions and not just the explicit fees. By balancing the costs against the benefits a plan offers, it will provide an accurate picture of the impact of the costs on an individual, according to the report.

The report established the frameworks using a sophisticated analysis that includes income, account balances, and the risks a participant might encounter. Among them are market risk, growth risk, inflation risk, and longevity and mortality risk. By doing that, the report provides a more holistic solution.

The biggest concern for those entering retirement is longevity risk or the risk of running out of assets in retirement, according to Nikolich. It is nearly impossible to solve that problem without incorporating insurance.

“We solved the accumulation side and what are the tools that we need, and insurance is one that can help solve that longevity risk on behalf of the individual,” he said.

Insurance can be used as an asset allocator and it doesn't matter the type an individual uses, he said. However, by using insurance, Nikolich believes that a person can significantly increase their withdrawal rates by as much as 70%. 

“By incorporating insurance, you can improve your sustainable spending rate versus what you could do if you are trying to manage it yourself,” he said.

AllianceBernstein had conducted previous participant research and found that a significant majority of people do not understand what constitutes a sustainable withdrawal rate. About half believed they could withdraw 7% annually and still have enough to last throughout retirement. 

“The problem with doing it yourself is you take out too much money because you don’t know what a sustainable withdrawal rate is and you end up running out of money or you try and self-insure and it’s a very inefficient way to try to translate your savings into income without insurance,” Nikolich said.

Effectively utilizing insurance as an option in a qualified default investment alternative can also improve workforce management for firms, the report said. As for the type of insurance, there are three potential forms of insurance that the paper describes that can be used in this manner. 

They are immediate fixed annuities, such as a single premium immediate annuity (SPIA), deferred fixed annuities, like a qualified longevity annuity contract (QLAC), and lifetime income insurance on a participant’s portfolio, such as a guaranteed lifetime withdrawal benefit (GLWB).

A benefit of having insurance as an asset allocator means more growth or equity exposure, according to Nikolich. That additional exposure can offset the costs of the insurance. 

“You can’t really eliminate longevity risk without insurance, but you shouldn’t have to give up your growth exposure and you shouldn’t have to take on any mortality risk to do so,” he said.