As lifetime income solutions continue to trend upwards, plan sponsors are inquiring more about retirement income in workplace plans.
New findings from T. Rowe Price’s Defined Contribution (DC) Consultant Study, which explores the latest retirement plan and investment attitudes from DC advisors and consultants, shows that more employers have an opinion about retirement income today compared to past years. Today, only 19% of plan sponsors do not have an outlook on retirement income, compared to 59% in 2021.
While not all employers are prioritizing or implementing retirement income in their plans, the study shows that more are likely to have a view on the resource in 2024 rather than in prior years.
T. Rowe Price’s study also highlighted the increasing value of personalization in workplace plans. While there is strong support for managed accounts as an opt-in option offered on the investment menu, T. Rowe Price is skeptical on whether the vehicle will surpass target-date solutions as the most popular qualified default investment alternative (QDIA), despite its gradual rise in past years.
Results in the study suggest that advisors are “significantly more likely” than consultants to use managed accounts within a dynamic or dual QDIA structure, whereas participants are automatically defaulted into a target-date solution and moved into a managed account solution when approaching retirement.
Specifically, T. Rowe Price found that more advisors and consultants are looking into managed accounts with an income planning feature and target date investments that offer a managed payout feature or an embedded annuity feature to deliver retirement income.
“Consultants and advisors are looking for solutions that offer choice, personalization, flexibility, and are cost-effective. This becomes especially clear when observing how drastically perspectives have shifted on retirement income in just three years reflecting plan sponsors’ increased engagement on the topic,” said Jessica Sclafani, global retirement strategist at T. Rowe Price. “Our research shows there is no consensus solution when it comes to retirement income; however, consultants and advisors rank a systematic withdrawal capacity, managed accounts with income planning features, and target date investments with a managed payout feature as most appealing for the delivery of retirement income.”
Push for CITs
As collective investment trusts (CITs) finally outpace mutual funds as the most popular target-date vehicle, consultants and advisors expressed strong and unanimous support for transitioning from target-date solutions to CITs, primarily due to its cost-effective fee structure.
Survey results also emphasized growing support for target-date solutions that employ a blended mix of active and passive investment strategies. These could potentially offer lower cost investment and reduced tracking error while still having the advantages of active management.
For those invested in target-date solutions, consultants and advisors expressed moderate to strong support for adding or increasing exposure to nontraditional bond investments. According to T. Rowe Price, when evaluating consultant and advisor implementation preferences for fixed income strategies, return-seeking fixed income approaches, like bank loans, emerging markets debt, high yield, and international or global bonds, are consistently viewed as best implemented using active management.
Additional findings
Plan sponsors are adding financial wellness programs to improve worker satisfaction, productivity, and recruitment and retention. This year, more are also seeking exploring emergency savings accounts as a wellbeing tool. According to the study, 70% of consultants and advisors believe that in-plan emergency savings programs are posed to increase in prevalence within the next three to five years.
Others are scaling back on interest involving alternative investments and environmental, social, and governance (ESG) investing. Consultants and advisors in T. Rowe Price’s survey did not identify any of the five categories of alternative investments listed as likely to be widely implemented in DC plans. Instead, a custom target-date solution is the most likely vehicle for implementation of direct real estate, private credit, private equity, and hedge funds, while commodities are considered as most likely to be implemented in an off-the-shelf target date solution, T. Rowe Price reported.
ESG integration was identified by 71% of respondents as the best method of implementation within DC plans. However, the survey found that consultants and advisors continue to view the evolving regulatory and legislative developments related to ESG as challenging.
T. Rowe Price’s study surveyed 35 of the leading consultant and advisor firms (71% consultant, 29% advisor), representing more than $7.5 trillion in assets under advisement (AUA).
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
