New research out today shows that while most 401k plans offer tools and advice, meaningful in-plan retirement income solutions are still more of an afterthought.
While workplace retirement savings plans have evolved significantly over the last four decades, they still fall short in providing workers with lifetime retirement security, according to a study from PGIM, the $1.5 trillion global asset management business of Prudential Financial, Inc.
The study found that 23% of plan sponsors still do not offer any retirement income solutions as part of their investment menu. But there’s one thing most (72%) plan sponsors do agree on: technology-enabled customized solutions are necessary to meet retirement income needs.
“The passage of the 2019 SECURE Act had positive implications for plan sponsors and their participants as it relates to retirement income. But our research indicates that we must continue to evolve these offerings, particularly with the help of technology, to ultimately meet the decumulation needs of American workers,” said Josh Cohen, PGIM head of institutional defined contribution.
Plan sponsors indicate stable value funds are the most common retirement income solution, with 54% offering them in their 401k plan, followed closely by income funds in a target-date fund series (50%).
Other investment solutions offered include long-duration fixed income funds, managed accounts, in-plan and out-of-plan annuity products and managed payout funds.
Plan design and communication
While the vast majority (89%) of plan sponsors offer tools and advice on how to meet retirement readiness goals, PGIM’s research indicates there is room for improvement in terms of plan features that facilitate a better understanding of how to spend down assets in retirement. For instance:
- Only 66% of plan sponsors said they communicate account balances to participants in terms of projected retirement income
- 49% allow participants to take systematic withdrawals
- 35% set retirement readiness objectives for participants and measure results
“In addition to investment options, plan design and communications play a critical role in helping workers solve for lifetime income,” Cohen said. “Communicating lifetime income projections, which will be required for DC plans subject to ERISA thanks to the SECURE Act, and allowing systematic withdrawals are relatively simple enhancements plan sponsors can make to have a positive impact on employees’ retirement income stream.”
The future of retirement income
According to PGIM, the next generation of retirement income solutions should deliver both guaranteed lifetime income as well as non-guaranteed components that leverage asset allocation and asset-structure best practices, liability-driven investing concepts and institutional investments.
“Plan sponsors need to evolve their defined contribution plans to focus not only on retirement savings, but also achieving adequate retirement outcomes,” Cohen added. “By embracing new technologies, robust income communications, customization opportunities, and risk mitigation solutions with both non-guaranteed and guaranteed investments, DC plans have the potential to help workers meet their retirement income challenges.”
PGIM’s research series, The Evolving Defined Contribution Landscape, conducted in partnership with Greenwich Associates, surveyed 138 DC plan sponsors who have at least one 401k plan and at least $100 million in 401k assets to shed light on changes within the industry including the use of OCIOs, alternatives, ESG and retirement income. For more detailed findings, check out The Holy Grail of DC: Income in Retirement.
PGIM ranks among the top 10 largest asset managers in the world with $1.5 trillion in assets under management as of Dec. 31, 2020.
SEE ALSO:
- 401k Pod(k)ast: Wade Pfau on Common Retirement Income Mistakes that Can Kill a Portfolio
- More Large 401k Plans Seeking to Retain Retiree Assets
- Why the Time is (Finally) Right for Lifetime Income in 401ks
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
