Plan Design Blog

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

29 October 2021

4 min read

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

This information is for exclusive use of the wholesale person to whom it is provided and is not to be relied upon by any other person. It is not intended for retail or public use and may not be further distributed without prior written consent of ABAL.
This webpage has been prepared by AllianceBernstein Australia Limited (“ABAL”)—ABN 53 095 022 718, AFSL 230 698. Information in this webpage is only intended for persons that qualify as “wholesale clients,” as defined by the Corporations Act 2001, and is not to be construed as advice. This webpage is provided solely for informational purposes and is not an offer to buy or sell securities. The information, forecasts and opinions set forth in this webpage have not been prepared for any recipient’s specific investment objectives, financial situation or particular needs. Neither this webpage nor the information contained in it are intended to take the place of professional advice.
You should not take action on specific issues based on the information contained in this webpage without first obtaining professional advice. Past performance does not guarantee future results. Projections, although based on current information, may not be realized. Information, forecasts and opinions can change without notice and ABAL does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained in this webpage, ABAL does not warrant that this webpage is free from errors, inaccuracies or omissions. ABAL disclaims any liability for damage or loss arising from reliance upon any matter contained in this webpage except for statutory liability which cannot be excluded.
No reproduction of the materials on this webpage may be made without the express written permission of ABAL. This information is provided for persons in Australia only and is not being provided for the use of any person who is in any other country.