Plan Sponsors, Providers Face Challenges Creating Retirement Income

When considering the typical experience for retirees as they approach living off of their savings instead of a paycheck, Fiona Greig suspects many are uncertain and confused about how and where to begin.

Greig, global head of the investor research and policy group within Vanguard’s investment strategy group, points to observations of 70,000 retirees and considers their decisions very revealing. Vanguard examined information from people made who had been in an employer-sponsored 401(k) plan administered by Vanguard—those considered had a median balance of $130,000—and tracked what they did for five years after age 60 once they left the plan. Of that group, about half took withdrawals of varying amounts, 27% did not take any withdrawals, and about 23% cashed out entirely, she says.

“This just speaks to: Wow. Some people, maybe a lot of people, just don’t know what to do,” says Greig, who is based in Washington, D.C.

Turning retirement savings into regular income continues to pose a challenge for both plan participants and plan sponsors who want to help them. Some see a range of solutions—from providing more guidance to redesigning plans to offering guaranteed income strategies—as all helping retirees resolve how to create steady income in retirement.

Redesigning for Better Decumulation

For some time, Suzanne Mayer, executive director of the Illinois State Universities Retirement System, who helps oversee $4.7 billion in defined contributions plans and $24.3 billion in a defined benefit plan, has seen the need to redesign decumulation offerings within the defined contribution plan. Her intent was to find a way to offer guaranteed lifetime payments for retirees, similar to benefits offered by the defined benefit plan, but with more flexibility than a traditional fixed annuity, according to Mayer, who is based in Champaign, Illinois.

“Guaranteed lifetime income was a matter of importance to SURS in keeping with our mission to secure and deliver the benefits promised to our members,” Mayer says in an email response. She helped implement a redesigned 401(a) retirement plan savings plan in 2020, and a new 457(b) deferred compensation plan in 2021. Both included the SURS Lifetime Income Strategy, in partnership with consultant AllianceBernstein, as the default investment option.

With the lifetime income option in place, educating participants is a top priority in the year ahead, including developing additional user-friendly resources.

“Our goal is to ensure our members have the information they need to make the most informed decisions about their retirement when the time comes,” Mayer says.

Improving Social Security Strategy

David Blanchett, head of retirement research and a portfolio manager with PGIM DC Solutions, considers retirees’ biggest problem to be managing the risk and uncertainty of their own longevity. This is particularly key for retirees in defined contribution plans, as their life expectancy may be three to five years longer than the average American, he says. As an example, he considers a married couple, male and female, age 65, both enrolled in a DC plan. The probability of one of them living to age 95 is about 50%, while the average probability of a non-DC participant doing so is closer to 20%.

“Plan sponsors are interested in helping their participants retire more successfully around longevity risk,” says Blanchett, based in Lexington, Kentucky.

One part of the solution is offering better advice for when to claim Social Security retirement benefits, he says.

“There is only one thing that exists that can simultaneously address longevity risk and inflation risk, and that is clearly Social Security,” he says.

Blanchett recommends that plan sponsors first help retirees think more strategically about Social Security. The last report he published found that about 20% of plan sponsors offered a Social Security planning tool, up from 13% two years ago.

“There’s been some positive movement there, but to me, that is the absolute lowest lift for plan sponsors who want to help their participants allocate to lifetime income,” he says.

Seeking ‘Choice Architecture’

Greig also sees the need to guide people into creating what she calls a retirement paycheck.

“We have all this wonderful choice architecture in the accumulation phase: We help people enroll, we help people escalate their savings rate, we help people get invested in target-date funds, which are professionally managed allocations that are age-appropriate and balanced. All those good things,” she says. “But we don’t have a lot of choice architecture that nudges people to do really anything in the decumulation phase.”

Looking at the behavior of retirees Vanguard tracked for five years, Greig is most concerned about the roughly 25% of retirees who cashed out their DC plan balances within the first year. One-quarter had accumulated at least $50,000 in assets, more than a year’s worth of income. Greig would like to see more people convert their savings into regular payouts, for which Vanguard is working on a default-like experience for retirees that could, “with … a stronger nudge … be a reasonable and sustainable way to turn this pot of money into a paycheck,” she says.

Another approach Greig advocates is in simplifying some financial decisions by making it easier to consolidate and preserve their assets for retirement through plan design. For example, automatic portability permits the transfer of low balances (less than $7,000 in 401(k) assets) when a participant changes jobs. Vanguard is one of the founding recordkeepers of the Portability Services Network and is encouraging its clients to join, she says.

“People have nine jobs over the course of their careers, so each time they switch jobs, they’re opening a new 401(k) account, and if you’re just on the job for a year or two, you could easily have many accounts over the course of a lifetime and many small pots of money,” Greig says.

Choosing the Best Option

Once participants move into retirement, Greig sees a lot employers can do. For starters, some plans still do not allow retirees to receive installment payments from their accounts, other than required minimum distributions.

“We’re working with our clients to first enable this as a plan design feature and then step in and offer our drawdown coach and our paycheck solutions that we already have ready for retirees,” she says.

While the market currently offers abundant products and services ranging from equity-based to hybrid annuities to managed accounts, Greig sees a need for guidance and easier “default-like” experiences for the retiree.

“What I think is missing is this client experience that makes it easy for retirees to make one of the hardest decisions in their financial lives, which is to take all of their hard-earned money and saved pennies and start spending in retirement,” Greig says.

More on this topic:

	Products Could Aid Decumulation Dilemma, but Plan Sponsors Remain Hesitant
	How AI, Digital Tools Drive Potential for Decumulation Innovation
	Cracking Open the Annuity Dilemma