Transcript:

Andrew Stumacher: So, Chris, we’ve been working for years with planned sponsors on how to help them shift from savings to retirement income–focused plans for their participants. And one of the questions is, whose life is it that you’re trying to solve for?

Christopher Nikolich: No one is the average participant. No one fits the average in each and every specter in terms of how long you’re going to live. Is it 87, or might it be a hundred, or might it be 70? No one fits the average in terms of the market environment, in terms of what we expect from stocks and bonds every year. No one has the average in terms of inflation.

All of those things historically were the average because they were smoothed out among thousands of participants because of the defined benefit plan. But now, for you as an individual, it’s all about your specific circumstances, and it doesn’t matter what happens to everyone else and what the average person looks like.

AS: And so, how do we educate planned sponsors on how to think about the most important characteristics of a solution, so that they can solve for the range of outcomes that participants are going to experience?

CN: Well one is [that] it has to provide income for life. And that is table stakes; so, think of that as a given. But it can’t solve the one risk and provide you income as long as you live, but expose you to this big loss if you surrender your capital at 65 and you happen to die at age 70. It also has to think about what happens over multiple decades in terms of market performance.

It can’t just be focused on minimizing some of your short-term drawdown risk. It has to be delivering to you value. If equity markets rise in value, as they tend to do over time, you should still be participating in that. You shouldn’t have this massive opportunity cost for not having any growth exposure.

And something that’s become a lot more in focus today is the risk of inflation. Providing nominal income for life just is not enough, if inflation is going to significantly erode your spending power.

AS: So, just hearing that, traditional fixed annuities don’t seem to address all of those things. And perhaps that’s why participants haven’t really adopted them widely for their retirement purposes.

CN: Fortunately, there are ways to, again, eliminate your longevity risk, but not take on mortality risk when you die early. The solution, there is a GLWB, a guaranteed lifetime withdrawal benefit, that solves that lifetime income problem. But it does so in a way that doesn’t expose you to risk if you die early, if there’s an inflationary environment, and doesn’t expose you to this huge opportunity cost of foregoing growth and surrendering your assets where you don’t have liquidity.

AS: So, in other words, the cost is much more predictable because it’s not tied to how long you might live and how the inflationary environment performs. Those things are essentially benefits built into the GLWB structure.

CN: They are benefits. And it all gets back to the point of, people simply don’t live in the averages. And if that’s all you’re looking at, you’re going to erroneously think that you’re solving the needs of participants when you’ve only solved the one at the top of the list. What delivers the best results to everyone “on average” may deliver the worst results to each and every individual.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.