(PlanSponsor) - Employers offering robust retirement income options for workers is but one piece of the puzzle to help workers manage the retirement assets they have accumulated over an entire working career.
Plan sponsors need to think longer about the different lifetime income withdrawal options for defined contribution plan sponsors, new NEPC data shows.
While 84% of plan sponsor respondents currently offer retirement income solutions—most often in a target-date fund—several challenges remain for employers, including the absence of a consensus on how to develop guaranteed retirement income solutions, the NEPC 2022 DC Plan Trends and Fees Survey found.
For plan sponsors, the report revealed “a discrepancy” of thinking among employers, as retirement income, lifetime income and protections against longevity risk have become more prevalent and some employers may have conflated the distinctive qualities of each.
“Lifetime income can be retirement income, but retirement income does not have to be lifetime income,” explains Bill Ryan, partner and head of DC solutions at NEPC.
The NEPC report defined retirement income as any way a participant can withdraw funds from a DC plan, including through a target-date fund, a balanced fund or a stable-value fund. Lifetime income, by contrast, is a specific insurance product hedging that risk to an insurance company, says Ryan.
Among plan sponsors, 2% offer workers an insurance product—through a third-party annuity purchase window, adds Ryan.
“Nine out of 10 of our [plan sponsor] clients [offer] a target-date fund with systematic distributions, so 90% of our clients have a retirement income solution, [but] there’s a discrepancy between when people think about retirement income and lifetime income,” he says. “We think five years from now, you may see target-date funds plus an annuity window as probably the more common way to address this problem.”
Legislation passed by Congress—the Setting Every Community Up for Retirement Act of 2019 and the SECURE 2.0. Act of 2022—has drawn increased retirement and asset management industry attention to the issue and has shifted some focus to building lifetime income products for plan participants, adds Ryan.
With the legislation, “There’s more comfort level of focusing on plan design, which is getting the target-date fund correct, making sure that it supports income in retirement and then, secondarily … where do you complement that with any insured products [available through] a window or things of that nature?” Ryan says.
Because there are fewer private-sector pensions available for workers to retire on, many lack a secure stream of income in retirement and need to develop—through a guaranteed insurance product, such as an annuity, or via non-guaranteed income like 401(k) IRAs and stocks—a secure stream of income for retirement. Plan sponsors need to heed this, to support their employees’ retirement readiness, says Alison Lonstein, a principal and senior consultant at NEPC.
For plan sponsors to explore offering a lifetime income option with a guaranteed feature, a critical decision must be answered: the purpose of the workplace retirement plan.
“It could come down to one simple question: Do you believe your DC plan should be a savings or retirement plan?” she says. “There’s a lot of different paths [plan sponsors] could consider in thinking about how to build out the spending phase of their lineup.”
The NEPC report was written by Ryan, Lonstein and Andrianna Papadimitriou, an investment consultant at the NEPC.
The average DC plan respondent managed $1.9 billion in assets for 1,342 participants, and the median plan managed $805.9 million in assets for 4,506 participants, according to the survey. The survey included data from 207 DC plans, managing $283 billion in total assets for 2.2 million participants.
By Noah Zuss
March 7, 2023