Major obstacles are impeding the adoption of lifetime income solutions by 401k plan sponsors, but a new report from the Georgetown University Center for Retirement Initiatives offers a way around them to help retirees meet their lifetime income needs.
Challenges that are contributing to the slow pace of adoption by key stakeholders include potential litigation risks from ambiguous language when including lifetime income solutions; the lag in the operational and administrative support of lifetime income solutions; and, determining the level of income needed in retirement.
The report, “Generating and Protecting Retirement Income in Defined Contribution Plans,” was made public June 18 during the CRI 2019 Policy Innovation Forum. It was produced by the Center in conjunction with Willis Towers Watson.
The report notes that for the first time, defined contribution (DC) plan assets account for more than 50% of total retirement assets in the seven largest pension markets globally. With the shift from traditional pensions to a DC-centric system, the responsibility for making complex retirement savings and investment decisions has shifted to individuals.
“Innovative new tools, such as auto-enrollment, have made it more likely that workers will start and continue to save for retirement, but now there is a growing demand for plans to evolve from focusing on accumulating savings to generating retirement income,” said Angela Antonelli, the Center’s executive director.
Key objectives for retirement income include stability, maximization, longevity protection, growth potential, cost, and liquidity. The Center’s report examines how innovative lifetime income solutions can help improve retirement outcomes by looking at potential income strategies and balancing the risk trade-offs associated with each solution.
“Every individual has unique challenges and goals for their post-work years. Family circumstances, lifestyle expectations, health concerns, and other factors all combine to define personal retirement income requirements,” said David O’Meara, Head of DC strategy at Willis Towers Watson.
The authors studied a range of scenarios to show how different approaches achieve retiree objectives. Solutions discussed include:
- an immediate annuity
- a laddered bond portfolio
- a target date fund (TDF) using a systematic withdrawal plan
- a managed payout fund
- a TDF with a deferred annuity
- a TDF with guaranteed minimum withdrawal benefit
Battling low adoption rates
Although few would dispute the need for lifetime income solutions, adoption rates by plan sponsors and participants have been low.
Many retirees have a hard time determining just how much retirement income is “enough” and what approach will help them achieve their goals. The easier that policymakers and regulators make it for plan sponsors to offer lifetime income solutions, the greater the likelihood employers will adopt them.
At the same time, “plan sponsors should not let the ‘perfect be the enemy of the good,’ Antonelli said. “A range of available solutions can help retirees convert their accumulated savings into a sustainable stream of income in retirement.”
Factors such as plan design, participant demographics and behaviors, views on asset retention, portability, and regulatory flexibility will determine how, when, and what type of solutions will evolve and what individual sponsors will embrace, the report states.
“It cannot be emphasized enough that the easier regulators and policymakers make it for plan sponsors to offer lifetime income solutions, the greater the likelihood that more employers will adopt them,” the report concludes. “This will allow for the next generation of DC plans to evolve from accumulating retirement savings to generating retirement income and help to strengthen retirement security for millions of Americans.”
Access the full report here.