Four Questions to Narrow the Field of Retirement Income Solutions

For DC plan sponsors, developing a short list of income solutions is a good first step.

The ranks of retirement income solutions are already impressive and continue to grow as participants’ needs evolve and providers innovate. It may seem like a tall task for defined contribution (DC) plan sponsors to home in on the solutions that warrant a closer look—even as the growing demand for lifetime income adds urgency to the effort.

We think working through four critical questions, which address aspects such as the location, income certainty and accessibility of solutions, can help bring the field into sharper focus. The answers may help plan sponsors develop a short list of solutions that align with plan philosophy to serve as a stepping-off point for a deeper comparison.

1) Should participants stay in the plan or roll out of it to draw income? Once participants reach retirement age, they’re ready to start taking income from their savings. Offering an in-plan income solution keeps those assets at home, giving a plan more purchasing power. Also, participants will likely feel more confident with a fiduciary looking out for their best interests, evaluating the solution and managing their experience.

This avenue does require an organization to commit to administrative oversight and governance to effectively implement and manage solutions for an entire plan. While it may be the right answer for many participants, some may prefer access to other options outside the plan—even if not all those choices are institutionally priced and designed.

2) Should retirement income be guaranteed? Some solutions don’t guarantee income. These include systematic withdrawal distribution options or traditional target-date funds with no income component. Participants withdraw money in retirement until their account balance runs out. This approach creates longevity risk—the chance that participants outlive their income. On the flip side, participants might skimp on withdrawal levels to make their savings last—sacrificing their retirement quality of life.

Our surveys consistently indicate that many participants favor a guaranteed income stream to eliminate the risk of running out of money. Pooling risk with other guaranteed income purchasers may boost the level of sustainable income. But each solution has distinct costs—not all of them visible on the surface. Some may be able to deliver secure income without such side effects as the risk of failing to recoup the full benefit if an individual dies early or forgoing market-growth potential by surrendering assets up front.

3) Should income be incorporated within the QDIA or offered as opt in? Integrating an income solution with a plan’s qualified default investment alternative (QDIA), often a target-date strategy, has broadened adoption beyond opt-in solutions. That’s because auto-enrollment has harnessed participants’ inertia to steer them to solutions with better outcomes.

But not every income solution works as a default. Those without proper liquidity provisions may be restricted by QDIA regulations. Others may not allow participants to personalize them, a key aspect of using a solution as a default. After all, one size doesn’t fit all. If a plan offers an opt-in solution, we think any success with participant adoption hinges on focused, frequent communication with participants about the benefits and how to take action.

4) How will access to the income solution be addressed? It’s the “who, when, how” question of income solutions. It starts with deciding who’s eligible to invest: Retirees? Near-retirees? Anyone? When will they be able to start investing? They could start at retirement, though they might face risk from the fluctuating cost of income insurance when they buy it. Starting income-solution purchases before retirement may help promote income planning; seeing future income accumulate may encourage participants to save more earlier.

Then there’s the question of how participants access the solution. It could be part of the plan’s default solution or perhaps accessed through a managed account. A core menu option would appeal to do-it-yourselfers, or a plan could offer a separate series of target-date funds to serve as income solutions. The answer might be one of these options or perhaps a combination of them, depending on the distinct needs of different types of participants.

It may take time to work through the aspects of these questions and gain consensus on the answers, but we think it’s a worthwhile investment. It can help plans identify a smaller group of income solutions that best aligns with the plan philosophy and participants’ needs. This can focus efforts to dive deeper into each solution and compare them on a level playing field.

As we see it, this is a vital step on the road to better retirement outcomes for participants.