Should DC Retirement Income Planning Be “Do It Yourself” or “Just Do It for Me”?

28 August 2024

4 min read

David Hutchins, FIA| Portfolio Manager—Multi-Asset Solutions

Henry Smith, CFA| Investment Strategist—Multi-Asset Solutions

Most Defined Contribution (DC) pension savers pursue retirement readiness on their own, but few grasp what’s required, according to our latest surveys.

From managing credit card debt to evaluating a car finance agreement, even everyday financial decisions can be hard. Investing for retirement can be even more challenging. Most people try to tackle retirement readiness themselves, but only a few have the acumen for it.

That’s a mismatch we believe UK DC pension fiduciaries must help realign.

Recently, both the Financial Conduct Authority and The Pensions Regulator have focused more intently on ensuring members are retirement-ready. Our retirement research fully supports that important shift in priorities and suggests an ultimate destination: a lifetime-income default solution.

Survey Results Show Low Levels of Retirement Readiness

In both our UK and US surveys of DC members, respondents consistently overestimate the percentage amount of their DC pension savings they can afford to spend in retirement—or they simply don’t know.

In our latest UK findings, a clear majority of respondents (57%) answered “don’t know”. A sizable minority (9%) chose implausibly large numbers: 6% of respondents thought they could spend 11%–20% of their retirement savings each year without exhausting their pot, while 3% expected to spend more than 20%. Only 18% provided a somewhat realistic answer—“up to 5%”—while a further 3% believed that only 0% withdrawals would ensure their savings would last through retirement! (Display).

Members Don’t Know How Much They Can Spend in Retirement

How Much of Your Pensions Savings Do You Think You Will Be Able to Spend Each Year Without Ever Running Out of Money Through Retirement?

A large water drop drips from a tap, and is colour-coded with the breakdown analysis of the UK respondents’ answers.

Unweighted base: all GB employees with a defined contribution pension arranged through their employer (2,566)
As of 10 March 2023
Source: YouGov and AllianceBernstein (AB)

By comparison, respondents to our US survey, Inside the Minds of Plan Participants, were more confident—but still mostly inaccurate. Just 11% believed they could withdraw 1%–3% per year (a figure that we feel would probably see them safely through retirement), with 33% opting for a more aggressive 4%–6%.

A total of 45% of US respondents chose percentage withdrawal rates that are likely unsustainable (7%–9% through 13%+). Adding in the 12% of respondents that answered “don’t know”, that means 57% couldn’t identify a sustainable withdrawal rate.

Basic Questions, Questionable Answers

Our latest US survey posed further readiness-related questions—and the answers made it clear that members need more help.

The questions gauged DC savers’ understanding of key financial topics. Subjects covered some basics, such as how simple interest adds to savings; other topics were a bit more complex (but pertinent), like the effects of interest-rate changes on bond prices.

Only 13% of US respondents answered all six questions correctly, and 20% scored two or less, highlighting how DC savers are typically unprepared for complex investment decisions that could have sizable consequences for achieving a sustainable income in retirement (Display).

US DC Saver Quiz Results Reveal Gaps in Financial Literacy

A table sets out the US respondents’ answers, ranked from “perfect score” (13%) through “total fail” (2%).

Source: AB, Inside the Minds of Plan Participants, 2023

The survey also found differences among age groups and genders, highlighting that some groups need more help than others. For instance, those under 35 years old scored much lower than older savers, while the percentage of women answering correctly was lower than the men’s across all six questions. Remarkably, younger savers better understood how the compounding of interest works—perhaps because student loans and other long-term debt weigh on their minds more than for older DC savers.

Income Solutions Should Recognize Access and Growth Needs, Too

Both our UK and US surveys highlight members’ reluctance to annuitize—indicating that lifetime income isn’t the only key goal for DC savers today. They increasingly want growth potential and access to their assets too.

In our UK survey, 85% of respondents told us that having flexibility in how they access their savings was “very important” or “fairly important”. In the US, survey respondents went one step further. Two-thirds were willing to take $10,000 less in annual income if it meant they had the flexibility to tap into their savings at any time—and that their money had the potential to grow based on market returns.

These results suggest to us not only a broad alignment of preferences across US and UK DC savers, but also a need to carefully consider flexibility in the design of retirement-income solutions.

Whether it’s about financial literacy, different attitudes toward investing or varying preferences, helping an increasingly diverse body of DC plan members invest for retirement has its challenges. But we believe that knowing what members are thinking should galvanize fiduciaries to consider providing more support in retirement.

Increasingly, lifetime-income default solutions are gaining more prominence on both sides of the Atlantic. For fiduciaries, we think it makes sense to explore these approaches, especially given the insight that many savers simply aren’t ready to go it alone—and they shouldn’t have to.

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

David Hutchins, FIA

David Hutchins is a Senior Vice President and Head of AB's Multi-Asset Solutions business in EMEA. He is responsible for the development and management of multi-asset portfolios for a range of clients. Hutchins joined the firm in 2008 after spending two years at UBS Investment Bank, where he was responsible for devising and delivering innovative capital markets risk-management solutions for pension schemes. Prior to that, he spent 13 years at Mercer, where he served as a European principal and scheme actuary, providing trustee and corporate advice to a range of UK pension funds and their sponsors. Hutchins holds a BSc in mathematics and a PGCE from the University of Bristol. He has chaired the Investment Management Association's Defined Contribution Committee and formerly chaired the defined contribution industry working group for the UK government's "defined ambition" project. Hutchins is a Fellow of the Institute and Faculty of Actuaries. Location: London

Henry Smith, CFA

Henry Smith is a Vice President and Investment Strategist on AB’s Multi-Asset Solutions team. He is responsible for the product strategy and communication of AB’s UK defined contribution, custom multi-asset and sustainable multi-asset solutions. Smith joined the firm in 2019, following more than two years at Lane Clark & Peacock, where he provided investment, research and governance advice to a range of UK defined contribution pension schemes. Before that, he worked at Capita Employee Solutions, where he advised both UK defined contribution and defined benefit pension schemes. Smith holds a BSc in financial economics from the University of Essex and is a CFA charterholder. Location: London

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