The U.S. retirement landscape has changed dramatically over time as the risks and responsibilities for retirement savings shifted from company-provided defined benefit (DB) pension plans to employee-funded defined contribution (DC) plans.
However, this sea change has not eliminated DB plans. Indeed, assets in the top 100 corporate DB plans today collectively exceed $1.3 trillion,1 creating an opportunity for plan sponsors, advisors and consultants to better serve participants who continue to have exposure to some type of pension. The retirement picture is nuanced for those nearing retirement—it is more than a simple shift from sole reliance on DB to sole reliance on DC.
Daniel Yem, J.P. Morgan Asset Management’s Head of Retirement Income, explains how access to DB benefits varies across generations and why this is an important consideration for plan sponsors, advisors and consultants in order to better serve today’s retirees and future generations.
A multigenerational shift from DB to DC
It is often said that DBs are obsolete, but this is mostly true for younger workers who joined the workforce after employers transitioned from offering DB plans to DC plans. For those participants nearing retirement today, many may have access to some form of pension benefit (see below slide from the Guide to Retirement).
Today’s retirees face a distinctive challenge
Many of today’s retirees face the challenge of meeting spending needs through a combination of partial DB benefits and DC savings balances—neither of which may provide sufficient income replacement on its own. This is especially true in today’s environment of increased longevity and rising healthcare costs.
This challenge is compounded by the choice modern DB plans offer at retirement: receive lifetime income or a lump sum. It’s not surprising that the majority of participants opt for the lump sum, particularly when the option to receive lifetime income is an irrevocable one.
For those who elect a lump sum, options are often limited to rolling the balances into an IRA, where they become solely responsible for investment decisions and making their savings last a lifetime. While financial advisors offer the expertise to help navigate these complex decisions, nearly half of the participants we surveyed do not leverage a financial advisor for retirement planning.2
This presents an opportunity for plan sponsors, advisors and/or consultants to ensure DC plans are not just an effective accumulation vehicle, but have the capability of supporting decumulation and income generation as well. Without such assistance, there is a rising risk of suboptimal retirement outcomes, including inefficient drawdown strategies or premature depletion of assets.
DB and DC plans can be complementary
For plan sponsors, advisors and/or consultants, the opportunity lies in treating their DB and DC plans as complementary offerings they make available to their participants. For example:
- DC assets can be mapped into the DB plan to provide access to institutionally priced income annuity options
- DB lump sums can also be mapped into the DC plan to provide retirees access to institutionally priced investment options such as Collective Investment Trusts (CITs) and more flexible lifetime income solutions
For sponsors and participants alike, a shift in plan focus from replacement to integration—i.e., leveraging DC plans to enhance and complement the partial DB benefits that many participants still hold—will better meet the evolving needs of a diverse workforce.
Meeting the opportunity
DC plan designs can be refined to help close this retirement funding gap. Sponsors should consider incorporating plan features and engagement strategies such as:
- Partial distribution options to help participants translate DC saving balances into income in retirement while retaining access to institutionally priced investment options in-plan
- Enhanced participant communications and education—including clear summaries of options available and tools to help consolidate DC balances from prior employers
- In-plan lifetime income solutions that balance flexibility and liquidity with income security
As lifetime income options continue to gain momentum within DC plans, sponsors should consider how these solutions can work alongside existing DB benefits for near-retirees. Done well, DC retirement income solutions can deliver the certainty that DB plans once offered, while affording participants greater control over their savings and the flexibility to adjust as their needs change.
Ultimately, the evolution from DB to DC does not eliminate the relevance of pensions—it reshapes how retirement income is delivered.
For information, check out J.P. Morgan Asset Management’s Guide to Retirement.