It's Time to Get Serious About Retirement Income Solutions

Emerging data suggest that more DC plan participants are keeping retirement balances in their employersponsored plans after retirement. We first detected this trend within T. Rowe Price’s proprietary recordkeeping data—a source that we regularly mine to unearth productive insights for our clients and partners. Over the last three years of available data, participants who separated from service at age 65 or older retained more assets within their DC plans than in prior years. For example, in 2012, 45% of account assets remained in plans at least a year after retirement. That figure catapulted to 61% in 2018.¹

Our observations were corroborated by data from the University of Michigan Health and Retirement Study (often referred to as the “HRS database”). The survey’s data also suggest that retired participants have started keeping more assets in employer-sponsored plans. Among retired respondents age 65 to 69, the percentage who left assets in a prior employer’s plan jumped from 31% in 2012 to over 38% in 2016.²

Giving a more detailed voice to plan participants’ stated expectations, recent T. Rowe Price-sponsored research with over 4,000 DC plan participants found that while current retirees receive, on average, 6% of their retirement income from DC plans, current workers (i.e., future retirees) anticipate that 29% of their retirement income will come from their DC plans.³ This discrepancy suggests that future retirees will expect more income from their DC plans than retirees of today.

Many plan sponsors have signaled a desire for their plans to become “destination accounts” where participants aggregate assets and ultimately transition those assets into, and remain throughout, their retirement. In fact, T. Rowe Price research with plan sponsors revealed a widely held preference to keep retiring participants within their plans. Fewer than 6% of large plan sponsors* indicated a desire for retiring participants to leave their plans. In contrast, 50% of large plan sponsors articulated a clear preference for participants to stay in their plans as they transition into retirement.⁴ Whether their aim is to increase or defend their plan’s assets (and the economies of scale that come with it) or to better assist participants with achieving the best outcomes possible, plan sponsors and their participants are apparently aligned—more retirees are staying in plan, and many employers are happy to keep them.

The data reviewed thus far suggest a one-way trend toward greater use of DC plans to not only save for retirement, but to cover ongoing living expenses as well. However, drilling further yields another interesting but conflicting layer of findings.

While more participants are keeping money in DC plans after they retire, a smaller percentage of this accumulated wealth is being distributed now than in years prior. Within our same sample of DC participants referenced earlier, DC-sourced assets make up 46% of current retiree financial assets (Fig. 2). However, these assets are currently only attributed to providing 19% of retirees’ income. In other words, a disproportionately small amount of income is being derived from this growing pool of DC household wealth.3 Looking to HRS data for another perspective, we see a similar trend. Far fewer respondents reported receiving benefits from their retirement plans in 2016 than in 2012.2

So what is this telling us? While defined benefit (DB) plans were specifically built to generate income in retirement, the DC system was designed to support supplemental savings. Given the DC system’s origin and historical focus on accumulation, DC plans today typically provide few (if any) reliable tools or investment solutions that can help participants strategically convert their savings into retirement income.

Taking stock of the current state, many DC plans allow participants to receive partial withdrawals or even schedule automated withdrawals over time, so structuring retirement income from these DC plans is possible. However, creating a strategic plan for retirement income is not a simple process.

Why? With a career’s worth of accumulated assets—not to mention possible household assets from a spouse—retiring participants have a wide range of assets from which to generate retirement income.

In a nationwide study on retirees conducted by T. Rowe Price, we found the number one need for advice or support was for managing a plan to convert your retirement assets into a stream of income in retirement.³

Furthermore, in terms of objectives and needs in retirement, the participant landscape is varied. The points highlighted in Figure 3 show two fundamental challenges that plan sponsors and retiring participants face when addressing retirement income needs—the question of when they will need to begin using their retirement savings, and how much money they may need to live comfortably in retirement.

However, a variable retirement age and the amount of income Social Security will replace is just the beginning. Retirees also wrestle with the issues of longevity risk, planning for health care costs, choosing higher consumption now versus planning for higher potential health care costs later, and the desire to leave a financial legacy to heirs—the list of needs and considerations is long.

As participants reach retirement, there is often a need to set a personal course for their portfolio based on their unique financial situation, preferences, and objectives.

At first, this may seem somewhat at odds with the DC industry’s innovation born from the Pension Protection Act of 2006 and the “automatic revolution” that it quickly inspired. Although plan features such as automatic enrollment can aid early-career retirement planning by simply helping participants save as soon as possible to take advantage of compounded returns over time, it’s difficult to address retirement income needs in a similar one-size-fits-all way.

Prior to retirement, plan participants are typically focused on saving. Thus, plan sponsors typically offer a variety of investment choices with that goal in mind. Common offerings include a suite of target date funds, a diverse mix of equity and bond mutual funds, and even a self-directed brokerage option. Additionally, the plan sponsor may offer education and insights that provide guidance on proper saving levels, investment choices, and more.

Plan sponsors can continue their relationship with participants after they retire by continuing to offer relevant products and services, but with a focus on income rather than saving. Sponsors can help participants with distributions and adjust fund offerings to include more income-focused investments. Moreover, education and insights can be geared toward retirees who are seeking guidance on proper income levels and the appropriate asset allocation.

Research suggests that plan sponsors are acutely aware of the varying needs of their retired participants. In fact, nearly three-quarters of plan sponsors surveyed agreed that a suite of retirement income solutions would better serve retired participants due to their varied individual needs and objectives. In contrast, only 12% indicated that a singular retirement income solution incorporated into the DC default was the best approach.³