Retirement Plan Sponsors’ Interest in Retirement Income Is on the Rise

401(k) consultants and advisers offer insight on the sentiments they are seeing from plan sponsors and make suggestions.

Nearly two-thirds of the largest and mid-sized 401(k) consultants and advisers believe that sponsors want to continue to serve individuals once they retire, according to PIMCO’s 13th annual Defined Contribution Consulting Study. This is up 14 percentage points from the year before.

PIMCO’s findings are based on a survey of 238 large and mid-sized consultants and advisers serving 109,000 clients with more than $4.9 trillion in plan assets.

Sixty-six percent of these advisers and consultants recommend that sponsors offer a retirement income tier to serve retirees. Eighty-four percent think this should include distribution flexibility, 41% think it should include education and tools, and 38% think it should include retiree-focused investment options.

Seventy-eight percent think retirees’ equity exposure should be 40% or less. Seventy-two percent think distributions should be done on a monthly basis, and all believe that annual distributions should be north of 4% of assets.

The study also found a significant shift in plan sponsor priorities, with most large and mid-sized consultants and advisers now ranking reviews of target-date funds as the highest priority (63%), followed by evaluation of investment fees (44%) and administration fees (28%) and simplification of investment menus (25%). 

When evaluating target-date funds, 84% think that the glide path is the most important factor, while 56% think it is fees. Thirty-one percent think the cost of managed accounts are justified. However, only 6% think managed accounts deliver superior performance to target-date funds (TDFs). Fifty-three percent think managed accounts offer value through their customization, but only 37% think participants provide the necessary information for that customization.

Sixty-two percent think that custom and white-label strategies can offer superior performance, especially for equities (44%) and fixed income (41%).

“We are starting to see a definitive shift in sentiment across the DC [defined contribution] landscape, as plan sponsors seek to tailor plan offerings not only to those currently saving for retirement but also those who are already in retirement,” says Rick Fulford, head of U.S. defined contribution at PIMCO. “Retirees demonstrate a propensity to spend only from available income, while preserving account balances, so we’re not surprised by the emphasis on income generation and capital preservation.”