Diverse stakeholders shared perspectives at AB’s Advancing Retirement Income symposium.
As the wave of DC plan participants seeking retirement income security continues to grow, plan sponsors face pressing questions on the best way to approach guaranteed lifetime income. Tackling the key issues was the objective at AB’s recent retirement income symposium, Advancing Retirement Income: Applying Lessons Learned to Shape the Future, at the firm’s headquarters in Nashville, Tennessee.
The stakes are growing greater for funding retirement years, as the “longevity economy” makes it critical to help people financially prepare for longer lifespans. Three of the World Economic Forum’s six longevity economy principles relate to financial needs, including the need to “ensure financial resilience across key life events.” That’s a sizable challenge, given that by 2050, more than 2.1 billion people will be over 60 years of age.
Amid what we see as an ideal convergence of forces—from participants’ income worries to a growing field of solutions and increased understanding of the organizational benefits of retirement income security—a diverse range of attendees recently convened to dive into the critical issues and chart a path forward. Guests included senior executives from DC plan sponsors, consultants who advise plans, AB’s retirement thought leaders, industry experts and organizations.
Here, we share key takeaways from the event.
Make Retirement Income Personal, Because Individuals Aren’t Averages
Solving for the retirement income gap across a diverse workforce is a complex challenge that was explored in depth at the event.
Retirement can be intensely personal for individuals, with their unique combinations of circumstances and lifespans. When considering income solutions, it’s key to assess potential individual participant outcomes, not the average—because people simply don’t live in averages. For DC plans, a solution that seems to meet the needs of all participants “on average” may not be right fit for every individual.
In addressing retirement security, plan sponsors are empowered to advance the quality of life for their employees, so it’s critical to intimately understand workforce demographics and retirement security gaps—including unknown ones. At the symposium, recent research revealed some of the hurdles to achieving more inclusive outcomes.
For example, analysis by the Collaborative for Equitable Retirement Savings suggests racial disparities in account balances from different contributions, the use of loans and preretirement withdrawal behavior. Black and Hispanic workers have lower retirement savings than their white counterparts, contribute less and are more likely to take preretirement withdrawals, which may affect wealth building. Likewise, research conducted by the Employee Benefit Research Institute and National Association of Government Defined Contribution Administrators through the Public Retirement Research Lab suggests that gender disparities have led to men having larger account balances than women, largely because men contribute more and take on greater equity risk in their portfolios.
The desire to bridge these differences may be a catalyst for DC plans—and their solutions—to evolve to a future state to better meet the needs of a diverse employee base. Some of the measures that may help include moving from voluntary to auto-enrollment, implementing auto-escalation, increasing default deferral rates, implementing emergency savings programs and integrating guaranteed lifetime income.
Income Insurance: Better than “Do It Yourself”
Some DC plan participants today manage their retirement income on their own, without income insurance. Instead, they contribute to a workplace retirement account, which may be a target-date fund; at retirement, they are then left to manage account withdrawals on their own as they seek to meet their retirement income needs.
The drawback in this approach is that the related income is uncertain; many participants may aim too high or too low in estimating how much they can withdraw. In our most recent survey of plan participants, for example, almost one-third of participants believe they can withdraw an alarmingly high 7% or more from their accounts each year in retirement.
Miscalculations could force participants to reduce withdrawals, lowering their living standard, or to withdraw too much and risk running out of money. So, going it alone doesn’t seem like a sound option for typical participants who don’t have enough guaranteed income from other sources, such as Social Security or a defined benefit plan, or accumulated wealth that reduces their reliance on DC plan income.
Learning Solutions Now Could Improve Outcomes Tomorrow
The symposium stressed the importance of plan sponsors “hitting the books” now on retirement solutions to better understand the growing array of products available.
That message was reinforced by a primer on insurance options. Guaranteed solutions with an insurance component are wide ranging, from single premium immediate annuities (SPIAs) to qualified longevity annuity contracts (QLACs) to registered index-linked annuities (RILAs). “Hybrid” solutions combine a typical investment account with income insurance riders.
Doing the homework now may lead to more informed decisions when selecting a lifetime income option, but evaluating them on a level playing field can be a challenge. The “Evaluating Retirement Income Solutions Through an Investment Lens” session discussed the notion that typical factors don’t go far enough in evaluating solutions.
For example, when considering risks to plan participants, we quite often see factors such as longevity risk and market risk included. But we believe that the framework should be broader, encompassing other potential risks. These include mortality risk, which is dying before fully recouping benefits from assets surrendered up front in annuities. A more robust framework, in our view, captures a broader set of risks and assesses both explicit and implicit costs not visible on the surface.
Align Lifetime Income Solutions with Plan Philosophy
Guaranteed lifetime income is increasingly one of the “to do” items on plan sponsors’ lists as they assess solutions. One of the first orders of business is to ensure harmony with the overall plan’s philosophy.
That philosophy could be implementing a default solution designed to automatically shift participants into an income solution, just as using target-date funds as the default option has shifted participants into diversified asset allocations that automatically evolve allocations over time. Or, the philosophy could center on choice, providing a range of investment options for participants.
Some plan sponsor symposium attendees who’ve put income solutions into place have taken concrete steps to review income goals and ensure that they sync up with the plan’s larger objectives. For others, the alignment may center on streamlining and simplifying the plan’s investment menu, designing better and more engaging communications for participants, weighing fees/costs against benefits or delivering better performance from the investment managers who run the solutions.
Build Consensus Early in the Process
Not surprisingly, selecting and implementing lifetime income solutions involves an organization-wide effort. It’s not surprising that discussions among the symposium attendees touched on the theme of engaging a broad range of stakeholders with distinct viewpoints early on.
The list of stakeholders is comprehensive. Participants’ buy-in is vital in inspiring take-up. Senior leadership helps ensure that solutions align with the firm’s benefits strategy. Investment committee members dig into the nuts and bolts of solutions and how they stack up against each other. Recordkeepers, consultants and solutions providers also play critical roles.
Early consensus may help foster a shared understanding of the specific challenges participants face, and a sense for how the design of an income solution addresses—or doesn’t address—them. Another point of coalescence is working collectively to launch a participant education strategy that meets participants where they are to communicate the benefits in a variety of formats.
Start with Small Steps…and Use the Resources
Speakers at the forum attested that the process of introducing guaranteed income involves many moving parts. Based on their personal implementation experiences, they provided their insights on smoothing the process by taking care of some of the more straightforward tasks first. Also, as mentioned earlier, the education and evaluation process could use some early attention.
Most of these sponsors noted that they made sure to leverage insights from a substantial array of industry resources, including consultants, investment managers, recordkeepers and other subject-matter experts. For example, it’s helpful for sponsors to proactively engage with their recordkeepers to explore what options are currently available on their platforms and what is likely to be available in the future. Of course, the experiences and reflections of plan sponsors who have already implemented guaranteed income options may provide a rich source of up-close-and personal insight.
The Advancing Retirement Income symposium was intended as a forum to explore these challenges, to share best practices and lessons learned that may help DC plan sponsors on the path forward. The ultimate goal is to better understand how we can individually and collectively play a part in building financial resilience for the diverse workforce of the future.
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