How Should DC Plans Deliver Lifetime Income to Typical Participants?

Steady income and access to remaining assets are key considerations for DC plan sponsors. 

Many defined contribution (DC) plan participants want secure income that lasts for their lifetimes, but they may be unwilling or unable to create such an income stream on their own. Plan sponsors are in a good position to help, with a number of solutions available designed to deliver secure lifetime income. 

Given the distinctions, it may be challenging to compare lifetime income options without a level playing field, and that’s where we think a comprehensive framework can help. One important consideration in such a framework is accounting for participants’ priorities with regard to two key goals: steady income and access to their remaining account balance. 

Satisfying the Need for Both Income and a Remaining Balance

According to our latest DC plan participant survey, two-thirds of respondents would choose a lower initial guaranteed income amount in order to keep control of their assets, with potential growth through market gains. This suggests to us that the majority of participants want lifetime income as well as growth and access to their remaining account balances, although income remains their primary concern. 

For these typical participants, we think the notion of receiving income for life without having to give up growth or liquidity, as with a guaranteed lifetime withdrawal benefit (GLWB), may be an efficient choice. Participants keep access to and control of their assets, while insurance addresses the risk of outliving their income payments (longevity risk). 

The GLWB may also avoid side effects from surrendering assets up front—as some solutions require. These side effects may include the risk of dying earlier than average and forgoing the ability to leave some or all of a nest egg to beneficiaries (mortality risk). They might also include forgoing decades of potential growth on account assets (growth opportunity cost).

DC plans could also consider allocating some savings to a single premium immediate annuity (SPIA) or qualified longevity annuity contract (QLAC). These offer guaranteed payments from the annuitized portion that may eliminate the risk of outliving income payments (longevity risk). While participants may be able to maximize immediate income with a SPIA, or maximize income later in life with a QLAC, in practice only some assets would likely be annuitized, resulting in less guaranteed lifetime income. 

Self-Insurance May Work—for Those Who Can Afford It

Other participants may decide to self-insure—investing their assets in a target-date solution or other balanced fund and managing the income withdrawals on their own. We don’t believe this is a sound option for typical participants: they may spend too much and increase their longevity risk, or be forced to underspend in order to avoid running out of money in bad markets.

Some participants, however, may have guaranteed income from other sources, such as Social Security or a defined benefit plan. Or they may have significant wealth accumulated. As a result, they don’t need their DC plan to generate substantial lifetime income. An effective path for these participants, in our view, might be to avoid the cost of income insurance, withdraw minimal income and keep the remaining assets in growth-generating investments. However, based on our experience, most DC participants lack the accumulated wealth, the sustainable income or both to self-insure prudently.

With Lifetime Income Solutions, Flexibility Matters

Different methods of generating income for life may fit different needs among plan participants. Annuitizing assets through a SPIA or QLAC purchase may be most effective for those who care only about maximizing initial income or maximizing income later in life, while self-insured target-date solutions may work for those who don’t need lifetime income.

For plans seeking to benefit a wide spectrum of workers who want lifetime income as well as control of and access to their retirement savings, it may be worth considering the use of a GLWB. This option doesn’t require an irrevocable up-front asset surrender that may hinder automation and wider usage. As we see it, it offers a continuum along the retirement-saving path that participants are already traveling. And because it can be used as a qualified default investment alternative, plan sponsors may use automation in an effort to drive greater adoption.