- Thoughtful consideration of a participant’s journey, both up to and through retirement, can help participants meet their retirement goals—and better position plans to retain assets.
- More defined contribution (DC) plan participants are keeping their savings in plan after they retire, and future retirees expect to derive a greater share of retirement income from their DC plan balances.
- Despite more assets remaining in plans, money is being distributed at lower levels. This suggests that participants may need help converting DC plan assets into an income stream once they reach retirement.
- Every participant has their own unique circumstances that will impact their preferences for certain product features, such as income yield, income duration, income volatility, asset liquidity, and asset preservation.
- There is no one-size-fits-all solution for retirement income. Participants’ unique and changing needs require various solutions to help them achieve their goals.
Participants Need Help
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.
Figure 3: Two Variable Factors That Influence Retirement Income Needs
The Case for Choice in Income Solutions
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.
The Savings Tier
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.
The Retirement Tier
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
Figure 4: Different Needs May Require a Range of Solutions5
* For the purpose of the study, large plan sponsors were noted as managing plans with over $500M in plan assets.
1 Percent of account value retained by defined contribution (DC) plan participants, age 65 or older after 1, 2, 3, 4, or 5 calendar years following separation from service.
2 Health and Retirement Study, (HRS Core) public use data set. Produced and distributed by the University of Michigan with funding from the National Institute on Aging (grant number NIA U01AG009740). Ann Arbor, MI, 2014 and 2016.
3 RSS4 © 2018 NMG Consulting. All rights reserved. Conducted for T. Rowe Price by NMG Consulting.
4 See What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters at troweprice.com/dcio.
5 Clingman, M., Burkhalter, K., and Chaplain, C. (April 2019), Replacement Rates for Hypothetical Retired Workers. Actuarial Note 2019.9. Social Security Administration, Office of the Chief Actuary. On the Web at: https://www.ssa.gov/OACT/NOTES/ran9/an2019-9.pdf.