One of the greatest financial challenges facing individuals is generating an adequate amount of income in retirement, PGIM, the global asset management business of Prudential Financial Inc., notes in its survey report, “The Holy Grail of DC: Income in Retirement.” The report is the third in the firm’s “The Evolving Defined Contribution Landscape” research series.
PGIM finds that while defined contribution (DC) retirement plans have undergone significant evolutions over the past four decades, they still fall short in providing workers with lifetime retirement security. Retirement income solutions are increasingly becoming more relevant and necessary.
“We believe there isn’t going to 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.
“In addition to investment options, plan design and communications play a critical role in helping workers solve for lifetime income,” says Josh Cohen, PGIM head of institutional defined contribution.
“When we think about income in retirement, it goes far beyond offering in-plan income solutions,” says Renee Schaaf, president, retirement and income solutions, at Principal Financial Group. “It starts with the participant experience and education: getting started saving for retirement and getting educated about financial wellness. It all points to getting participants ready for retirement and includes a safety net of income that manages longevity and inflation risk.”
To begin, it’s critical that participants start saving, because if they are not doing so, they won’t have any assets to use for income in retirement, Schaaf says. Using digital tools and techniques to create incredible experiences for participants will help, she adds.
“We’ve made a lot of investment in Principal Real Start,” she says, referring to the firm’s participant onboarding platform. “It is engaging and intuitive and we’ve found participants defer about 60% more [with Principal Real Start] than when they join the plan through normal enrollment channels.”
Once participants are contributing to employer-sponsored DC plans, plan sponsors should educate them about financial wellness overall, Schaaf says. Embedding digital tools into the participant experience helps them understand that what they do today will have a profound impact on their future, she adds.
Plan sponsors surveyed by PGIM indicate stable value funds are the most common retirement income solution, with 54% offering them in their 401(k) plan, followed closely by income funds in a target-date fund (TDF) series (50%). Other investment solutions offered include long-duration fixed-income funds, managed accounts, in-plan and out-of-plan annuity products, and managed payout funds. However, 23% of plan sponsors indicate they do not offer any retirement income solutions as part of their investment menu.
Schaaf says traditional TDFs and asset allocation tools made available to participants might not go far enough in helping create retirement income.
“There’s a need to really personalize the participant experience based on individual risk profiles, time horizons and other assets they may have,” she says. “There are now managed accounts that provide advice and take what the participant is willing to input to continue to manage investments on an ongoing basis. Participants can get help with what investments to choose, how much to save, when to retire and when to take Social Security.”
Schaaf says some TDFs allow participants to specify their risk tolerance, but she thinks the next generation of asset allocation funds will be more personalized. “I think the quickest way to get there is through managed accounts,” she says.
When thinking about the need for retirement income guarantees, annuities can play an important role, depending on a person’s specific circumstances, Schaaf says. Principal has offered its Pension Builder retirement income solution for at least two years, she says. It embeds deferred income annuity sleeves into participants’ investments. Principal is exploring incorporating that option inside TDFs.
Pension Builder includes an institutionally priced annuity. If a plan sponsor chooses to make income guarantees available to participants, they have the opportunity to contribute a portion of their deferrals into the annuity.
“The SECURE [Setting Every Community Up for Retirement Enhancement] Act went a long way to adding certainty to this product,” Schaaf says. “The law provided fiduciary relief to plan sponsors when making products like this available.”
The PGIM research shows that the No. 1 step plan sponsors have taken to increase employee understanding of retirement readiness continues to be offering tools and advice on how to spend down in retirement, with 89% of total respondents saying that was their primary mechanism to prepare participants. The next-highest-ranked response was communicating account balances to participants in terms of projected retirement income, with 66% of overall respondents choosing this option.
The research also suggests there is an opportunity for sponsors to review their plan’s available distribution types. Providing systematic withdrawals, as opposed to a single lump-sum distribution, is a great step to provide more distribution flexibility to retirees and may allow them to set up an automated retirement paycheck, according to PGIM. Less than 50% of plans with assets between $100 million and $1 billion allow systematic withdrawals, while about one-third of plans greater than $1 billion still don’t allow systematic withdrawals, the survey found.
“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,” Cohen says.
According to PGIM, the next generation of retirement income solutions should deliver both guaranteed lifetime income as well as non-guaranteed components that leverage asset allocation and asset-structure best practices, liability-driven investing (LDI) concepts and institutional investments.
The survey found that many plan sponsors recognize there is a need to offer retirement income solutions through a technology-enabled customized solution for pre-retirees and retirees: 72% of respondents said they strongly agree or somewhat agree that there will be a need for such solutions.
“Plan sponsors need to evolve their defined contribution plans to focus not only on retirement savings, but also achieving adequate retirement outcomes,” Cohen says. “By embracing new technologies, robust income communications, customization opportunities, and risk mitigation solutions with both non-guaranteed and guaranteed investments, DC plans have the potential to help workers meet their retirement income challenges.”
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