Plan Design Blog

For DC Plan Participants, Solving for Retirement Income Is a Challenge

October 29, 2021

4 min read

Jennifer DeLong| Managing Director, Head—Defined Contribution; President—AllianceBernstein Trust Company

Heather Balley| Managing Director of Participant Communications—Defined Contribution

After decades of saving for a comfortable retirement, plan participants eventually face the question of how to create an income stream from those savings. Most aren’t sure how to do that, even though income is the main reason they’re saving in the first place, according to our latest Inside the Minds of Plan Participants survey (Display).

Saving for Retirement

The top participant response (64%) to why they save was to ensure retirement income and the #1 answer for what’s important was a steady income stream.

Source: Inside the Minds of Plan Participants 2021 survey and AllianceBernstein (AB)

Lack of Confidence—and Time—Blur the Income Picture

What’s driving the disconnect between income priorities and realizing that income? A confidence shortfall, for one thing. Nearly half of plan participants (46%) said they don’t want to manage their investment mix, and roughly the same percentage is uncomfortable allocating plan options based on income goals. Low investment confidence may be connected to shrinking enthusiasm about outcomes: 44% of participants admitted they’re not confident their investments will generate enough income for life.

That uncertainty distorts participants’ perceptions of income sustainability. Our survey asked participants what percentage of a hypothetical $500,000 retirement nest egg they could spend annually without running out of money, and the answers were all over the map (Display).

The most common answer, 4% to 6%, may have made sense a generation ago when interest rates were much higher, but is much less realistic today. Many participants had even higher income expectations, and only 12% chose a more realistic 1% to 3% spending rate.

Participants Widely Differ on Income Certainty

How Much Can You Spend and Never Run Out…

Asked how much they think they could spend annually and never run out of money, responses ranged from 1% to 13% or more, while about 1 in 10 said they just didn’t know.

*Includes five ranges
Source: Inside the Minds of Plan Participants 2021 survey and AllianceBernstein (AB)

Participants Increasingly Want Control of Their Assets

Income uncertainty among participants is high on plan sponsors’ list of concerns. Default investment options, auto-enrollment and auto-escalation are all designed to help participants build income for retirement while requiring little hands-on involvement.

However, these enhancements don’t offer what our survey shows participants want most once retirement comes: control of their assets and flexibility. One way to give participants the control and certainty they desire is through guaranteed income solutions.

Solutions that either guarantee a specific amount of income in retirement or a specific withdrawal rate utilizing an insurance feature, such as an annuity, can offer these benefits and seem closely aligned with the direction most participants prefer. Given a choice, 67% of participants would rather have access to their assets after retirement and growth potential, even if it means receiving $10,000 less in guaranteed annual income (Display).

Participants Want Control and Flexibility

Would you rather…

Source: Inside the Minds of Plan Participants 2021 survey and AllianceBernstein (AB)

Not All Income Guarantees Are Created Equal

We think participants’ desire for tighter control of their retirement assets is a leap forward in ensuring a higher quality of post-work life. But control requires flexibility, opportunity and access—and not all income solutions offer them. For example, handing over a lump sum to a fixed annuity in exchange for predictable, guaranteed income provides steady income for life. However, if the income never rises, inflation could erode purchasing power.

So, not all guaranteed income solutions translate into a comfortable retirement, which may explain why only about one in 10 pre-retirees plans to buy an out-of-plan annuity; another 43% don’t have a particular solution in mind, so there’s work to be done on retirement income solutions. On that front, it was encouraging to see that nearly 20% of participants hope to leave their money in plan, where income solutions tend to offer more flexibility, access and growth potential along with their guarantees.

Evolving Income Needs Are Realistic and Achievable

Participants know what they want in retirement—reliable income. They’re also looking for help to decipher a topic that feels like abstract art into something tangible and understandable. And they want the ability to stay invested in the market for long-term growth potential and access their assets hassle-free.

These expectations are reasonable and obtainable, in our view, and income solutions must not only check the boxes but also be within reach and well explained. With baby boomers retiring in record numbers, income planning is a path for many plan sponsors to add a lot of fiduciary value right now. There's no shortage of income solutions to consider, but few can hit all these targets and turn savings into income that supports a comfortable retirement…for life.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Jennifer DeLong

Jennifer DeLong is a Senior Vice President, Managing Director and Head of Defined Contribution, responsible for leading AB’s defined contribution business in North America. She oversees product management and development, marketing, participant communications, and client services for the firm’s institutional custom target-date and lifetime income solution clients. Additionally, DeLong is responsible for firm’s Collective Investment Trust business and is President of the AllianceBernstein Trust Company. Since joining AB in 1999, she has held various senior client relationship management, product management and marketing roles, all primarily focused on defined contribution, 529 college savings plans and sub-advisory insurance services for both institutional and retail clients. Before joining the firm, DeLong worked in various sales, marketing and client relationship management roles for both small and mega-sized defined contribution plans. She holds a BS in business management with a minor in international business from The College of New Jersey, as well as FINRA Series 6 and 63 licenses. Location: New York

Heather Balley

Heather Balley is Managing Director of Participant Communications for AB's Defined Contribution business. In this role, she provides defined contribution product content, focused on plan participants, to the firm's Institutional and Retail clients. Balley is also responsible for AB's proprietary research that's focused on plan sponsor and participant behaviors, with special attention to target-date funds, participant engagement and confidence, and financial literacy. She joined AB in 2014 and has over 25 years of experience in financial-services communications and marketing. Prior to joining the firm, Balley held various roles in defined contribution, including positions at PIMCO, Lincoln Financial and Mercer Consulting. She holds a BS in marketing and economics from Lehigh University, and holds FINRA securities registrations 6, 26 and 63. Location: New York