Transforming defined contribution (DC) plans to incorporate aspects of defined benefit (DB) plans, including by adding lifetime income options to DC plans, has proved to be an epic challenge for the retirement industry. Lawmakers’ most recent attempt to address the challenge was the passage of the Setting Every Community Up for Retirement (SECURE) Act in late 2019.
The SECURE Act created a new safe harbor to ease liability concerns that had prevented plan sponsors from offering annuities within DC plans. It also aimed to add certainty for how plan sponsors can meet their fiduciary obligations when selecting an annuity provider and aspired to implement greater efficiency and cost savings to the provider selection process.
Retirement income challenges are many and come amid the ongoing and uneven impacts from the COVID-19 pandemic. Experts have pointed out that the retirement industry is also being highly affected by unexpected and early retirements, the aging American workforce and showing benefits will be reduced by 2034, all as plan sponsors grapple with how to get workers not only to but through retirement.
The pandemic and resulting effects have only shone a brighter light on the demand for retirement income arrangements that can provide certainty.
“Increasingly, plan sponsors want to get their people not just to, but also through, a high-quality retirement and, as a result of that, this industry is ripe for the development of new products and solutions that speak to these needs,” says David Blanchett, head of retirement research at PGIM DC Solutions, part of PGIM. “For some time now, there has been a lot of talk about making DC plans more friendly to retirees and to efficient retirement spending, but plan sponsors are now truly starting to push this trend forward in a big way.”
Blanchett is well-known in the retirement industry for his deep experience. Before PGIM—the $1.5 trillion global investment business of Prudential Financial—he was responsible for leading retirement research with Morningstar Financial, which is why he was tapped to lead retirement income solutions development at PGIM, says Andrew Dyson, interim head of PGIM DC Solutions.
Hiring Blanchett “reflects [our] vision for our role in the future of retirement income,” says Dyson. “Great products will need to be founded on great research, and David will be at the forefront of that.”
Another part of the SECURE Act that aimed to help DC retirement plan participants prepare for retirement income is a mandate, beginning in 2022, that DC plans provide lifetime income disclosures that illustrate how long savings are expected to last in retirement.
“Communicating lifetime income projections, which will be required for DC plans subject to ERISA [the Employee Retirement Income Security Act] thanks to the SECURE Act, and allowing systematic withdrawals are relatively simple enhancements plan sponsors can make to have a positive impact on employees’ retirement income streams,” says Josh Cohen, PGIM head of institutional defined contribution.
Despite the industry paying greater attention to lifetime income solutions and activity, take-up from plan sponsors has been slow.
According to Cerulli’s “U.S. Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities” report, asset managers expect that target-date funds (TDFs) with a retirement income vintage will capture the greatest new flows for in-plan options (38%), followed by a dynamic product (22%).
Figures from PGIM retirement research, “The Evolving Defined Contribution Landscape, The Holy Grail of DC: Income in Retirement,” show that while retirement plans have undergone significant changes over 40 years, many still are insufficient for providing workers with lifetime retirement security.
The research found that plan sponsors have most frequently tackled retirement income challenges with tools and advice on how to spend down savings in retirement, with (89%) of respondents surveyed saying that is the primary mechanism. Other methods include communicating account balances to participants in terms of the projected retirement income they will generate (66%) and allowing participants to take systemic or partial withdrawals from plans in addition to lump-sum withdrawals (49%).
There won’t be “a one-size-fits-all approach, but there are many steps plan sponsors can take to support their employees’ retirement-income objectives—evaluating plan design enhancements, educational tools and resources, investment and distribution advice, enhanced administrative functionalities, and investment solutions designed to provide income throughout retirement,” PGIM says.
The PGIM survey also found that the top retirement income solutions offered by DC plan sponsors surveyed were stable value funds (54%) and income funds in a TDF series (50%).
Given the expected demand for retirement income in the coming years, the retirement industry will likely remain focused on the next generation of lifetime income solutions, according to sources.
This message was emphasized during the latest webinar in the PLANSPONSOR 2021 Plan Progress series, “Measuring the Success of your DC Plan,” as Stephanie Hunt, a retirement plan consultant at OneDigital Retirement + Wealth, explained. In the past two years, conversations about lifetime income have jumped, she said.
“I’ve had way more conversations with folks in their late 50s, early 60s who are going to retire and are asking ‘What’s my next step,’” Hunt said. “I’m hopeful that there’ll be a lot more resources for those employees to know what to do next, because this is ideally the largest sum of money that they will ever have in their life and then having to use that for the next 10, 20, 30 years.”
While the retirement industry has focused on the accumulation phase for almost four decades, decumulation and living in retirement will remain challenges, added Daniel Peluse, executive director at Wintrust Retirement Benefits Advisors.
“We need to make sure that, yes, we’re successful getting them to retirement,” said Peluse. “We also need to make sure they’re going to be able to comfortably have that income for the rest of their lives.
“Our challenge as advisers is trying to then gauge success post-retirement,” he explained. “The challenge then becomes: How do we make sure folks can sustain a comfortable retirement?”
« FRIDAY FUN – December 17, 2021