Signs of accelerating interest in retirement income are everywhere. Headlines, press releases, industry conference sessions, white papers, boot camps, and product launches are more likely to reference retirement income than ever. Demand is apparent even to the naked eye.
Yet naysayers offer a contradictory position. They eschew survey data and claim no plan sponsor or participant demand exists.
These disparate positions trigger two questions: (1) who is right? And (2) is that even the right question? After all, when retirement plan decision-makers and policy experts look to innovate, are they guided by what participants are specifically asking for at any given time? Or do they look to participant needs and then develop and implement responsive solutions? The answer is pretty clear: when making decisions regarding retirement plan features, products, and other solutions, participant needs trump any deference to their stated demands.
There Is Demand
The rise in demand occurs against a backdrop of worry. American workers are concerned about running out of money in retirement. That concern has risen to the point that they are less worried about death than running out of money.
Even as American employers have implemented automatic plan features that have addressed plan participants’ needs to save more and invest prudently, many of those participants face uncertainty regarding access to vehicles that will allow their retirement savings to last for the rest of their lives.
When asked, participants do demonstrate a desire for retirement income. In one recent survey, 83% of plan participants said their employers should offer in-plan retirement income options. In another survey, 89% said having guaranteed retirement income would positively impact their current well-being, and 71% said they would save more if their plan offered them a guaranteed retirement income solution. Yet another survey reflected participants’ belief that a steady income stream in retirement is the most important factor when saving for retirement, ranking ahead of protection of principal, growth as markets rise, and a diversified investment mix.
Those survey numbers do not jive with the notion that there is no demand for retirement income. Participants are resoundingly saying: Our employers should offer in-plan retirement income, guaranteed income would leave us feeling financially well, we’d save more if we had guarantees supporting our accounts, and retirement income is critical. There is demand.
Needs Trump Demand
But what if there weren’t expressly stated demand? What if, more specifically, there weren’t expressly stated demand for any of the particular solutions that are being developed and offered? What if one were to concede that there is not yet pounding-my-fists-on-the-table demand for solution X or Y, but also acknowledge that plan sponsors, plan fiduciaries, and participants all agree that participants need access to retirement income? Shouldn’t plan decision-makers, gatekeepers, and caretakers look to participants’ needs and proclivities when determining how to measure and enhance a retirement plan’s effectiveness?
History provides many examples of situations in which plan sponsors, fiduciaries, and policymakers responded to participant needs—and, critically, their behaviors—in developing and using new solutions that participants may not have likely even known to ask for. By enabling, designing, and implementing solutions that explicitly sought to overcome well-documented behavioral biases (procrastination, status quo bias, inertia, loss aversion, and lack of self-control), while being responsive to participants’ desire for choice and a degree of control, policymakers and employers were able to meet critical participant needs. Crucially, some of these innovations actually made use of the very biases they were designed to counter, resulting in simple and remarkably effective solutions.
For example, consider that participants were not demanding automatic enrollment and automatic escalation when Congress provided multiple optional automatic enrollment and escalation tools in the Pension Protection Act of 2006. At that time, newly hired employees were not demonstrating the necessary frequency of proactively enrolling in their plans, let alone demonstrating the initiative to demand automatic enrollment or automatic escalation. Armed with research, data, and policy evidence, employers began to implement and refine automatic features that took the burden of enrollment and contribution decisions away from employees.
Plan fiduciaries responded to needs and implemented solutions that aligned with participants’ interests while solving for suboptimal behaviors.
Similarly, there are parallels with the development and subsequent widespread utilization of target date funds, first as investment lineup options and later as the qualified default investment alternative (QDIA). Participants certainly were not asking for a retirement investment option that included a year in the name of the fund. They were not requesting a diversified glidepath that adjusted over time to manage risk as they neared retirement. Those who had not taken the initiative to proactively enroll—and were instead automatically enrolled—certainly did not demonstrate the initiative to demand that such an option be their default investment election. Yet without a more thoughtful default investment option, automatically enrolled participants commonly found themselves overallocated to equities or cash, neither of which was likely to best meet their needs.
Again, plan fiduciaries responded to needs and implemented solutions that aligned with participants’ interests while solving for suboptimal behaviors. As a result, nearly two decades later, millions of participants are in a better situation because the people they depend on—their employers, fiduciary committees, and outside service providers—appreciated the need to implement the solutions they need. They are participating at a higher rate, saving at higher rates as their careers progress, and receive professional money management. All of that, despite never demanding a thing.
Reframing the Question
The key questions center around what American workers need. Although not all plan-related decisions are fiduciary in nature, one can look to ERISA’s duty of loyalty for a reminder of the importance of being led by “interest of the participants and beneficiaries.” ERISA does not direct fiduciaries to discharge their duties “solely in [response to the demands] of the participants and beneficiaries.”
Do American workers need wider access to in-plan retirement income solutions? Yes. The question facing plan sponsors, fiduciaries, solution providers, and service providers is now: how do we best design and implement solutions that meet participants’ needs while solving for their preferences and behaviors? American workers are depending on their employers to help them retire with dignity, and it’s time the industry rose to the challenge.
SEE ALSO:
• 3 Spending Patterns Impacting Pre- and Post-Retirees
• Running Out of Money Scarier than Death for Most Americans
• The 2024 Game Plan for In-Plan Annuities
Rupa Athreya is the Chief Operating Officer at Income America. Matthew J. Eickman, J.D., AIF, is National Retirement Practice Leader at Qualified Plan Advisors.
