Retirement income planning has taken center stage over the last decade, shifting the conversation from its former emphasis on savings. The pivotal question “will I have enough” has widened to “will I have enough… income?”
As participants grow more vocal about their future income fears, lawmakers have joined the chorus too. In turn, many providers have stepped in to offer sponsors a rich menu of options to fill the gaps. This sets the scene for sponsors to carefully survey the changing landscape and weigh how they can help participants in their pursuit of retirement income.
What “Worry-Free” Retirement Should Mean Now
What makes for a comfortable retirement—the size of accumulated savings or ensuring that the money lasts? An account value of $400,000 may seem like a lot, until you see what it buys over the course of retirement. Focusing on how defined contribution (DC) plans can deliver income in retirement is gaining traction as a new priority, but old habits are hard to break. Since DC plans first hit the retirement benefits scene decades ago, participants were encouraged to focus on savings, and still are. Enroll, contribute, diversify across asset classes, contribute more, rebalance, etc.—all the right steps on the road to a well-funded retirement account.
But what about the actual retirement?
In recent years, it’s become painfully obvious that many retirees are either at risk of outliving—or actually have outlived—their retirement savings. Baby boomers remain particularly at risk, with 10,000 Boomers turning 65 each day.1 They’re living healthier, longer lives than earlier generations, and they need income to last longer than they first planned for. Even with Social Security supplements, which account for just 40%2 of the average retiree’s income, retirement income can steadily dwindle. That’s a far cry from “worry-free.”
Income Planning Goes to Washington
Congress helped move the needle for income awareness as part of the far-reaching Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019. For starters, the SECURE Act codified previously nuanced points that had given sponsors pause. For instance, it introduced a safe harbor for choosing insurance providers for annuities used inside a DC plan, welcome protection at a time when more sponsors are embracing their fiduciary duty. About 70% of sponsors now define themselves as a plan fiduciary, up from 58% in our prior sponsor survey.3
The SECURE Act also imposed new requirements for sponsors to forecast participants’ retirement income levels on a regular basis. While the new income-disclosure mandates are somewhat rudimentary, they’re still helpful snapshots of how far each participant’s current account balance can be expected to last after retirement.
For some participants, income statements might validate that they’re on the right track, but most participants will be disheartened. When we asked retirees what they would have done differently to plan for retirement, the majority said put away more money—twice the number of respondents who said they would have taken better care of their health.4 Hopefully, income-disclosure mandates should help motivate everyone to take action, and sponsors will play a key role in that.
Plenty of Solutions for Not Enough Income
Plan sponsors have been slow out of the gate to adopt retirement income options, even though 96% of them expressed the desire to add one to their plan, based on our findings.5 Why the disconnect, when the need and appeal are so strong? Our experience suggests that it stems from lingering uncertainty over which lane is best among so many income options and designs.
Generally, income options come in two flavors: non-guaranteed, such as retirement income funds or managed drawdown options, and guaranteed, like an immediate or deferred annuity or guaranteed lifetime withdrawal benefit (GLWB).6 And as the possibility of running out of money hits closer to home for many pre-retirees, their preference for guaranteed retirement income has intensified. Some 87% of those pre-retirees we surveyed considered any form of guaranteed income option appealing, whether it’s an immediate or deferred annuity or a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB).
With the variety of available options, it’s vital to stack up the differences and similarities before committing to one, based on varying participant needs and whether an option is flexible enough to address them. As a starting place, plan sponsors can narrow the field based on their philosophy and advice from consultants, asset managers and other providers.
Selecting an income option is only part of the decision process. Sponsors also need to consider access to that solution and how to offer it—for example, whether it’s served up in-plan or out-of-plan. With so many participants eager for income solutions, either approach can make a positive impact right off the bat. But they work very differently.
If sponsors provide an out-of-plan annuity option, for example, participants would turn to selected external insurance providers at retirement, establishing a contract and income stream directly with them. An in-plan annuity would benefit from DOL safe harbor rules, which help protect sponsors, assuming the annuity is structured correctly in the plan. In either case, participants would typically save money through discounts insurers offer in concert with the sponsor, compared with shopping around for an annuity on their own.
The most widely adopted in-plan options are managed accounts and GLWBs. Used with a target-date fund, an in-plan GLWB approach can serve as a Qualified Default Investment Alternative (QDIA), which typically leads to more participant use and better scale, among other benefits (see below). Managed accounts, alternatively, can be powerful tools for participants willing to take time to engage with their financial advisors.
Modern Problems: Dealing with Market and Interest-Rate Risk
After years of consistent contributions and thoughtful asset allocation, a lot can come down to a single moment. If markets are down at retirement, for instance, account balances—and income staying power—will suffer. The stakes are high for interest rates, too. If annuity rates are low at retirement, future income will be, too.
Not all income options come with guarantees, so they tend to have fewer moving parts and lower costs, which can fit well with some plan design goals. But they also leave much to chance. Guaranteed income options add protective layers that some sponsors may consider worth the additional fees. For example, most can protect against living too long (running out of income) and some can even address the issue of a participant passing away too soon (and conveying unused assets to beneficiaries).
Some of the more flexible guaranteed options let participants “buy in” to their future income in their working years (rather than waiting until retirement). This can lock in future income sooner, with added guarantees backed up by insurers (sometimes several insurers) to help spread risk and costs while eliminating the possibilities of an out-of-favor market and low interest rates.
Guaranteed Income Meets the DC Plan
As fiduciaries, sponsors understandably want to weigh everything that surrounds a guaranteed income option, from costs and implementation to communications and engagement. These solutions offer several benefits that are well aligned with a plan’s broader goals:
- Participant peace of mind that they’ll retire on their own terms: well over half of our surveyed participants said their top savings goal is to ensure a secure retirement income7
- Higher engagement, which can improve savings. We saw a 12% higher savings rate for those that were more directly engaged with their income strategies than those that weren’t8
- A strong talent recruiting and retention magnet, particularly if offered as an in-plan QDIA option with some flexibility
- Higher utilization overall and steadfastness in down markets, which stem from heightened participant trust and confidence when they know their future income is shielded from out-of-favor markets and low interest rates
- Simple to explain and illustrate, which makes it easier for sponsors to incentivize participants. Over 80% of workers said any advice related to securing guaranteed income is helpful to them.9
What Now for Sponsors and Retirement Income Solutions?
An evolving retirement planning landscape is generating new ideas and solutions. But the central question for plan sponsors is timeless: Are DC plans designed just for supplemental savings or to help participants draw a meaningful retirement income for life?
The answer is important, complicated and can no longer be dismissed. The need for lifetime income is dire, and that need will only be magnified as baby boomers continue to retire in droves. Sponsors looking to move in this direction have a lot to consider if they want to deliver customizable income solutions that give every participant a worry-free retirement.
- Jennifer DeLong
- Managing Director—Head—Defined Contribution
- Andrew Stumacher
- Managing Director—Defined Contribution
1Pew Research Center
3Inside the Minds of Plan Sponsors, AllianceBernstein
4Inside the Minds of Plan Participants, AllianceBernstein
5Inside the Minds of Plan Sponsors, AllianceBernstein
6Inside the Minds of Plan Participants, AllianceBernstein
7Inside the Minds of Plan Participants, AllianceBernstein
8Based on 75,000 active participants across AB’s DC plans that offer a guaranteed income option
9Retirement Confidence Survey Summary Report, Employee Benefit Research Institute
“Target date” in a fund’s name refers to the approximate year when a plan participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as a participant nears retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested—including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.