What is Sun Life’s new decumulation product?

In doing so, it joins Guardian Capital’s Glidepath and the Purpose Longevity Fund, among others. Even so, Sun Life describes MyRetirementIncome as “a first of its kind in Canada” that “fills a gap in our industry in Canada.” It also resembles asset allocation ETFs (exchange traded funds), like Vanguard’s VRIF (Vanguard Retirement Income ETF Portfolio).

There appears to be a market in Canada for these kinds of products, despite tepid initial sales of some of the above-named pioneers. In Sun Life’s press release, it says that 5 million Canadians are “turning 65 this decade,” so there’s “growing demand for retirement solutions that help Canadian retirees transition from saving to drawing income.”

Some cynics might opine that these are as much a solution for workplace pension managers to their own problem of retaining client assets accumulated during their clients’ wealth-building days.

Among the benefits Sun Life lists are that it turns savings into regular income. “Clients will receive regular payments delivered directly to a bank account, similar to a paycheque.” It’s flexible, providing full access to client account balances: “Money can be withdrawn or added at any time, without fees or penalties.” 

Despite a significant fixed-income component, it also provides opportunity for growth, with savings “invested in a well-diversified portfolio that is specifically designed for individuals in retirement, properly balancing risk and return to generate stable investment returns.”

Sun Life deploys its pre-existing multimanager Granite Moderate Retirement Fund as the base for MyRetirementIncome. It taps 16 global specialized managers for a similar number of asset classes; apart from the usual stocks and bonds, they include Emerging Market Debt, Liquid Real Assets, Direct Infrastructure, Liquid Alternatives and Direct Real Estate. Managers include: BlackRock Asset Management, Lazard Asset Management, Phillips, Hager & North, RBC Global Asset Management and its very own Sun Life Capital Management.

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Well-diversified mutual fund structure

Rona Birenbaum, founder of Toronto-based firm Caring for Clients, says the Sun Life offering is a “well-diversified portfolio in a mutual fund structure” and it is not an insurance product or annuity. That means its returns and payment levels are not guaranteed, as with annuities and insurance policies. 

Still, this Sun Life product can take away some headaches for those approaching or in the decumulation stage. It takes care of rebalancing and annual calculations of target draws, Birenbaum says. That’s fine, she says, “if you’re looking for someone else to make all the major decisions on product structure and how much you can afford to spend or withdraw.”

A Canadian retiree’s main decision with this Sun Life product is the age they want the funds to last until (the maturity age). They can choose from 85, 90, 95 or 100 (or select a few with a combination of ages); but they can also start drawing down as early as age 50. Sun Life recalculates the client payments annually, at the start of each year, based on the account’s balance. That has the firm looking at the total amount invested, payment frequency, number of years remaining before the selected maturity age, estimated annual rate of return (expected return is 5.5% but a conservative 4.5% rate is used in the calculations) and any annual applicable regulatory minimums and maximums.

Birenbaum says holders of MyRetirementIncome can arrange transfers to their bank accounts anywhere from biweekly to annually. While the payment amount isn’t guaranteed, they can expect what Sun Life calls a “steady income” to maturity age, so the payment isn’t expected to change much from year to year. If the client’s circumstances change, they can alter the maturity date or payment frequency at any time. While not available inside registered retirement savings plans (RRSPs), most other account types are accommodated, including registered retirement income funds (RRIFs), life income funds (LIFs), tax-free savings accounts (TFSAs) and open (taxable) accounts.

Emphasis on simplicity and flexibility

In a telephone interview, Eric Monteiro, Sun Life’s senior vice president of group retirement services, said, in MyRetirementIncome’s initial implementation, most investments will be in RRIFs. He expects that many will use it as one portion of a retirement portfolio, although some may use it 100%. Initial feedback from Canadian advisors, consultants and plan sponsors has been positive, he says, especially about its flexibility and consistency. 

As said above, unlike life annuities, the return is not guaranteed, but Monteiro says “that’s the only question mark.” Sun Life looked at the competitive landscape and decided to focus on simplicity and flexibility, “precisely because these others did not take off as expected.” The all-in fee management expense ratio (MER) is 2.09% for up to $300,000 in assets, but then it falls to 1.58% beyond that. Monteiro says the fee is “in line with other actively managed products.”

Birenbaum lists the pros to be simplicity and accessibility, with limited input needed from clients, who “simply decide the age to which” they want funds to last. The residual balance isn’t lost at death but passes onto a named beneficiary or estate. Every year, the target withdrawal amount is calculated based on current market value and time to life expectancy, so drawdowns can be as sustainable as possible. This is helpful if the investor becomes unable to competently manage investments in old age and doesn’t have a trusted power of attorney to assist them. 

As for cons, Birenbaum says that it’s currently available only to existing Sun Life Group Retirement Plan members. “A single fund may not be optimal for such a huge range of client needs, risk tolerance and time horizons.” In her experience, “clients tend to underestimate life expectancy” leaving them exposed to longevity risk. To her, Sun Life’s approach seems overly simplistic: you “can’t replace a comprehensive financial plan in terms of estimating sustainable level of annual draws with this product.” 

In short, there is “a high cost for Sun Life doing a bit of math on behalf of clients… This is a way for Sun Life to retain group RRSP savings when their customers retire … to put small accounts on automatic pilot supported by a call centre, and ultimately, a chatbot. For a retiree with no other investments, it’s a simple way to initiate a retirement income.”

However, “anyone with a great wealth advisor who provides planning as well as investment management can do better than this product,” Birenbaum says. “For those without advisors, a simple low-cost balanced fund or ETF in a discount brokerage will save the client more than 1% a year in fees in exchange for doing a little annual math.”

If the payments remain stable, inflation will erode the purchasing power of those payments. The younger the investor is when purchasing it, the more likely the investor will have to make excess withdrawals that further reduce payments. This, Birenbaum says, “is a negative spiral best avoided unless the investor has other assets to make up the difference.”

Is it really a first in Canada? 

Noted finance professor and author, Moshe Milevsky, says he’s not sure if he agrees with the “first of its kind in Canada” billing. Guardian launched something very similar a few years ago, called the GuardPath Managed Decumulation fund. Milevsky disclosed that he has worked as a consultant for Guardian.

Milevsky is “puzzled by how in the world retirees are supposed to pick their own longevity maturity date, that is whether they want to run out of money at age 85 versus 100; unless perhaps they are appealing to the MAID demographic in Canada.” (MAID stands for “medical assistance in dying.”) The maturity date can be changed, however.

Longevity risk is the biggest “new” problem in retirement decumulation, says Milevsky. That’s the danger some retirees face of outliving their money. “Unless you pool longevity risk, or pair the product with an annuity or a modern tontine, the drawdown solution is inefficient.”

Retired actuary Malcolm Hamilton, a senior fellow at the C.D. Howe Institute, told me that this new Sun Life product looks “relatively straightforward.” He says: “It’s not a tontine or annuity, there’s nothing there that suggests longevity pooling… It’s arguably useful to those comfortable with picking a maturity year… essentially the year beyond which neither you nor any dependent spouse expects to live. The product then tells you how much income you can draw.”

Once a Sun Life client chooses their maturity year, it takes the money and tries to turn it into a predictable income stream continuing until maturity. “It’s admirably simple,” says Hamilton. It will “force people to think about how long they’ll live and how much they can spend. The investment risks will need to be managed carefully to keep the distributions acceptably stable. Interested customers should ask about the size and frequency of future adjustments to ensure that they are tolerable.”

Tax and other considerations

Wealth advisor Matthew Ardrey, of TriDelta Financial, believes the new Sun Life product “will be helpful to many Canadians. Much of the retirement planning I do for clients is focused around decumulation and tax efficiency of those decumulations… Many of us understand how to save, but the fear sets in when we have to spend it. It falls back to the question that many clients have in the back of their mind, ‘Will I have enough?’”

In Ardrey’s view, Sun Life “essentially has created a dynamic drawdown schedule that will amend annually to ensure you have enough money to last you to your set retirement age. They are creating an annuity-like strategy, without the lock-up and of course guarantee that goes along with them.”

Personal finance columnist Rob Carrick of the Globe & Mail was one of the first journalists to describe MyRetirementIncome late in September. You can find his article here (paywall). The piece states these are currently for Sun Life clients only and in particular its DCPP (defined contribution pension plan) clients. 

Ardrey wanted to see how easy or difficult it would be to replicate what was described in that article, concocting the following “back of the envelope” scenario. He looks at an Ontario resident with $500,000 at age 65 and a 5% rate of return, with plans to take maximum LIF payments. Aiming to last until age 90, the income would remain steady between $35,600 and $36,900 until age 87 or 88, when the income is between $37,000 and $38,000. At 89, they can take 100% out as the maximum. 

“That said, there is about $40,900 in the account at age 89. So, for someone with just a DCPP, or looking for level income from their DCPP, does not need Sun Life to calculate this for them. They can do it themselves by simply electing the maximum LIF payment.”

In his experience, planning for an individual’s decumulation plan is generally more involved than this, Ardrey concludes. But he believes Sun Life will be able to sell MyRetirementIncome because so many people have a hard time wrapping their heads around the idea and execution of decumulation. Even so, he concedes it can be replicated relatively simply with LIF maximums.

“Having a portfolio with all different account types requires a different kind of planning,” says Ardrey. “This type of planning should be undertaken as part of a comprehensive financial plan and needs to be flexible to meet the changing needs of the client.” 

Read more Retired Money columns:

• Tontines in Canada: Moving from theory to practice as a solution to our retirement crisis
• How much money do you need to retire in Canada? Is it really $1.7 million?
• Infinite banking in Canada: Should you borrow from your life insurance policy?
• Should retirees in their early 70s partly annuitize?
• RRSP to RRIF, and LIRA to LIF: How it all gets done

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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