Retirement is incredibly complex and the movement to defined contribution (DC) plans, such as 401(k)s and 403(b)s, means Americans are increasingly responsible for figuring out how to make their own retirement work.
Risks abound, though, and interest and demand in lifetime income solutions continue to grow as a way to help retirees deal with all of the idiosyncratic risks associated with retirement. In this piece, we first provide context around the top concerns related to retirement among DC participants aged 55 to 65 and then review perspectives on allocating savings to lifetime income solutions.
Inflation is the most cited concern among respondents in a recent survey of full-time workers between the ages of 55 and 65 who were participating in an employer-sponsored 401(k), followed by poor market returns, outliving savings, healthcare expenses, and finally, caregiving expenses. There were differences by household income levels, though, where concerns about inflation decline as incomes increase, while concerns about healthcare expenses and market returns both increase as incomes rise.
There was considerable interest in lifetime income, especially related to products potentially offered in DC plans. For example, 87% of respondents were at least somewhat interested in allocating a portion of their retirement savings to a product that provides protected retirement income for life and approximately two-thirds were somewhat or much more likely to be interested in a product that was made available through their 401(k) plan.
Overall, these results suggest that as an industry we need to more proactively develop retirement solutions that actively address key retiree concerns, and that increasing availability of lifetime income solutions in the DC space is a path that needs to be further explored in the future.
Retirement Security
Understanding which perceived risks are top-of-mind for Americans is important since they shoud be actively addressed in any type of retirement income plan, as best as possible. To better understand this, PGIM DC Solutions worked with Morning Consult, who conducted an online survey from October 23 to November 1, 2024, which included 1,003 full-time workers between the ages of 55 and 65 who were participating in an employer-sponsored 401(k).
Respondents were asked to rank six potential threats to retirement security from highest to lowest (which were randomized to reduce any kind of bias associated with the rankings): inflation, healthcare expenses, poor market returns, outliving savings, caregiving expenses, and other. The exhibit below includes the results.
Top Threats to Retirement Security
| Inflation | Healthcare expenses | Poor market returns | Outliving savings | Caregiving expenses | Other | |
|---|---|---|---|---|---|---|
| Rank: 1 | 41.7 | 15.4 | 20.4 | 15.4 | 5.2 | 1.9 |
| Rank: 2 | 24.4 | 26.0 | 22.8 | 16.9 | 8.0 | 1.9 |
| Rank: 3 | 16.4 | 28.0 | 18.5 | 20.1 | 13.8 | 3.2 |
| Rank: 4 | 9.6 | 19.2 | 21.0 | 23.3 | 20.6 | 6.3 |
| Rank: 5 | 5.6 | 9.0 | 12.7 | 19.5 | 37.9 | 15.2 |
| Rank: 6 | 2.4 | 2.3 | 4.6 | 4.8 | 14.5 | 71.4 |
Among the six options, inflation was cited as the top threat by 41.7% of respondents, followed by poor market returns, with 20.4% citing it as the top risk, followed by outliving savings and healthcare expenses, both at 15.4%, then caregiving expenses at 5.2%, and then other.
While inflation was the top concern among all respondents there are clear differences. For example, inflation was ranked as a bottom-three threat by approximately 20% of respondents. This suggests retirees clearly have different perceptions about what could derail their retirement and therefore there isn’t likely to be a single product or solution that is going to help all 401(k) participants. We also note important differences by income. For example, inflation concerns decline as income rise, while concerns about healthcare expenses and poor market returns fall.
“Approximately 87% of respondents were at least somewhat interested in allocating savings to acquire more lifetime income.”
While there isn’t necessarily one way for DC participants to address each of these risks simultaneously, one way to simplify retirement is to allocate savings to a product or solution that provides protected or guaranteed lifetime income, which could include optimal delayed claiming of Social Security retirement benefits or purchasing an annuity that offers lifetime income.
There has been rising interest in products that provide protected lifetime income inside defined contribution plans, and we asked respondents how interested they would be in allocating a portion of their retirement savings to a product that will give them protected retirement income for life. We find that 22% are extremely interested, 32% are very interested, 32% are somewhat interested, and 13% are either only slightly interested or not interested. In other words, approximately 87% of respondents were at least somewhat interested in allocating savings to acquire more lifetime income.
Offering an annuity in a 401(k) plan would make it easier for participants to purchase a product (versus having them figure it out on their own). We also asked how the general interest in lifetime income would change if it were offered as part of the 401(k). We find that 67% of respondents would be somewhat more likely or much more likely to allocate to a product if it was offered in their 401(k) plan. Simply put, not only do 401(k) participants appear to want lifetime income, but they also want it even more if it’s available in a 401(k) plan.
Better Retirement Outcomes
401(k) plan sponsors have an important role to play when it comes to creating better retirement outcomes for their participants. Our recent survey suggests that inflation is a top concern among participants. One way to explicitly address this would be to include investment options in the DC plan that help mitigate inflation risks, which would include asset classes like inflation-linked bonds or real assets more generally.
Additionally, concerns about longevity risk can be directly addressed by helping participants optimally claim Social Security retirement benefits (which are explicitly linked to inflation), as well as offering some kind of lifetime income annuity. We note considerable interest in lifetime income more generally, but interest increases if the solution is made available in a 401(k) plan.
SEE ALSO:
• Retirees Prefer Spending Lifetime Income Over Savings
DISCLOSURES:
All investing involves risk. The views expressed herein are those of PGIM investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any security.
PGIM DC Solutions LLC (“PGIM DC Solutions”) is an SEC-registered investment adviser, a Delaware limited liability company, and an affiliate of PGIM, Inc. (“PGIM”), the principal asset management business of Prudential Financial, Inc. (“PFI”) of the United States of America.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
David Blanchett, PhD, CFA, CFP, is Managing Director and Head of Retirement Research, DC Solutions for PGIM, the global investment management business of Prudential Financial, Inc. In this role, he develops research and innovative solutions to help improve retirement outcomes for investors. He is also an Adjunct Professor of Wealth Management at The American College of Financial Services and a Research Fellow at the Alliance for Lifetime Income.