Americans are concerned about income in retirement. A study by Aon found that 80% of workers want some form of guaranteed income, and 70% of retirement plan sponsors believe their plan should offer lifetime income options.
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“Employers recognize that defined contribution plans are now an employee’s primary source of retirement income, given the decline of defined benefit plans. Plan sponsors have spent the last two decades simplifying their defined contribution plan investment menu to help participants save more and invest better with target date funds,” Aon wrote in a paper.
Aon laid out four steps to help plan sponsors roll out lifetime income options in their defined contribution plans. In some ways, DC plans will look more like the pensions of old.
“You could call it ‘defined income,’ where the employer establishes the contribution structure and has vehicles that are targeted to produce some levels of income,” Aon wrote.
- Set up periodic withdrawals. Allowing participants to take partial withdrawals gives them access to their savings without the risks associated with a total cash-out. About three-quarters of sponsors already do this, and 60% of those offer distribution options that make payments over a fixed number of years, according to Aon.
- Offer retirement income projections. Aon recommends that plan sponsors adopt modeling tools that show participants what they need for a secure retirement. The research firm estimates that employees need more than 11 times their final pay for a secure retirement.
- Expand core lineup with multiasset solutions. Following the DOL’s guidance that plan sponsors provide their participants with lifetime income disclosures, Aon recommends that plan sponsors consider how spending will differ when participants have a multiasset or TDF solution instead of an annuity.
- Introduce institutionally priced insurance solutions. Insurance products help protect against longevity risk, and plan sponsors can help participants access products that are less expensive than what they can find on their own.
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