Retirement Hot Topics

Planning for retirement income just got easier

With a record number of Americans retiring each year, and relying on their DC savings for income, the demand for in-plan solutions that provide guaranteed retirement income has never been higher.

The evolving role of DC plans

For the over 4 million Baby Boomers exiting the workforce each year, the role of defined contribution (DC) plans has shifted from supplemental savings vehicles to the primary funding source for retirement income. However, the products and solutions offered within DC plans have struggled to keep pace with this new reality. Daniel Yem, Head of Retirement Income, discusses the changes taking place.

Too many solutions still miss the mark

Following the passage of the SECURE Act of 2019, a wave of new retirement income solutions entered the market. Most of these solutions blend target-date funds—which, together with automatic enrollment and contribution escalation features, have been successful in addressing the savings challenge—with annuity products to tackle one of retirees’ greatest fears: running out of money. While this new round of annuity products addresses the risk of retirees outliving savings, they also introduce new challenges for plan fiduciaries. Moreover, the new solutions generally fail to address the biases consumers have long-held against annuity products.

Fiduciaries have concerns

Historically, fear of litigation has driven decision-making within the DC industry, stifling adoption of innovative new solutions. The lone bright spot: over time, plan fiduciaries developed robust due diligence processes to ensure the products and solutions they offer are prudently designed and managed. Typically, offerings are assessed across several dimensions, including fees, performance against a benchmark and investment philosophy/process.

In contrast, many of the annuity products within these new retirement income solutions cannot offer the level of transparency to which fiduciaries have become accustomed, thereby making it difficult for them to assess their appropriateness.

Behavioral biases are built in

For decades, academics have been perplexed by the so-called annuity puzzle—that is, if annuities address many of the risks associated with generating retirement income, why don’t more people buy them?

The answer is simple: real people have real preferences and real biases.

While traditional income annuities can offer participants protection against market risk and longevity risk, individuals have historically been unwilling to surrender all or part of their nest egg built over 40 years for a benefit they may not live long enough to realize.

We see these biases play out today: when pension plans offer participants a choice between annuity income or lump sum payment, the vast majority choose the lump sum—even if it is a suboptimal decision (i.e., it doesn’t maximize retirement income while minimizing risks).

This trend is likely to continue if income annuity options become more prevalent within DC plans.

Give participants what they want

With a record number of Americans retiring each year, and relying on their DC savings for income, the demand for in-plan solutions that provide guaranteed retirement income has never been higher.

The vast majority of respondents in our seventh survey of DC plan participants indicated a desire for a retirement income solution from their employers:

90% said that they would be interested in a plan option providing guaranteed income in retirement (Exhibit 1)
76% were very or somewhat comfortable keeping their savings in their plan after retiring and using it as a vehicle for drawing income
80% would be very or somewhat likely to leave their savings in their plan if it offered an option that used savings to help generate monthly income in retirement

Most participants like the idea of a guaranteed income solution as part of their plan

Exhibit 1: How interested are you in an option on your plan's investment menu that would provide you with guaranteed income each month in retirement that could be used to cover a portion of your expenses in retirement?

Note: 2024 total n=1, 503.
Source: J.P. Morgan Plan Participant Research 2024

To effectively help participants manage the complexities of retirement income, we must offer solutions that align with their preferences and directly address their biases.

Income growth potential, portfolio protection and income adjustment flexibility are the most valued retirement income solution characteristics on a net basis

Exhibit 2: Which are the three most important and three least important features when deciding on an option?

Note: 2024 total n=1,503.
Source: J.P. Morgan Plan Participant Research 2024

At last: In-plan solutions tackle longevity risk

Stable value collective investment trust (CIT) offerings have long served as principal preservation vehicles within DC plans, offering participants protection against market risk and the opportunity for growth with greater transparency than insurance general account offerings. With recent innovations in longevity protection solutions, the J.P. Morgan new SmartRetirement Lifetime Income¹ offering builds upon this familiar stable-value structure² to now address the unique risks associated with generating retirement income giving plan participants more of what they want:

Reliable income streams they won’t outlive³
Protection against market volatility
Opportunities for annual income growth
Flexibility to make adjustments over time
Freedom to opt-out at any time

Plus, they offer fiduciaries the transparency in fees, performance and investment processes they’ve come to expect.

In conclusion: Key considerations for plan sponsors

Now is a good time to:

Think about integrating a retirement income solution into your DC plan that better aligns with the evolving needs and expectations of today’s workforce.
Make sure your offering is reliable, flexible and leaves participants in control of their savings.
Proactively explore solutions with your asset manager partners, consultants and advisors.

Learn more about the new J.P. Morgan SmartRetirement Lifetime Income solution.

¹The SmartRetirement Lifetime Income product includes a suite of target date collective investment funds that, ten years prior to the target retirement date in a fund’s name, will begin to incorporate allocations to the Lifetime Retirement Income Fund, which in turn will invest in group annuity contracts issued by unaffiliated insurers to support the optional lifetime income feature that is part of the Spending Phase. The optional lifetime income feature’s guaranteed income stream is contingent upon various factors including, but not limited to, the claims paying ability and financial strength of the issuing unaffiliated insurance company, and the participant meeting the requirements of pre-determined conditions, including making only the guaranteed minimum withdrawals. The withdrawal of amounts in excess of the prescribed retirement strategy (including shifting funds from the Lifetime Retirement Income Fund to another investment) may result in the forfeiture of fees paid to the unaffiliated issuing insurance companies and the reduction or forfeiture of annuity payments by the insurers. JPMAM will not guarantee the obligation of the unaffiliated insurers to make annuity payments.

JPMAM does not guarantee the suitability or potential value of any particular investment. Investing in the SmartRetirement Lifetime Income product involves risks, including possible loss of principal. Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal.

International investing involves increased risk and volatility due to possibilities of currency exchange rate volatility, political, social or economic instability, foreign taxation and differences in auditing and other financial standards. Small-capitalization investments typically carry more risk than investments in well-established “blue-chip” companies since smaller companies generally have a higher risk of failure.

Historically, smaller companies’ stock has experienced a greater degree of market volatility than the average stock. Securities rated below investment grade are considered “high-yield,” “non-investment grade,” “below investment-grade” or “junk bonds.” They generally are rated in the fifth or lower rating categories of Standard & Poor’s and Moody’s Investors Service. Although they can provide higher yields than higher rated securities, they can carry greater risk. Real estate investing may be subject to increased market risk because of concentration in a specific industry, sector or geographical sector. These risks include, but are not limited to, declines in real estate value, risks related to general and economic conditions, changes in underlying value of property owned by the trust and defaults by borrower.

Asset allocation/diversification does not guarantee investment returns and does not eliminate the risk of loss.

²A stable value investment structure is generally a more conservative investment approach; however, there is no assurance that the fund will achieve its investment objectives.

³Contingent upon various factors, including, but not limited to, the claims paying ability and financial strength of the insurers. Annuity Payments are contingent upon various factors, including, but not limited to, the participant satisfying certain pre-determined conditions, including, but not limited to, adhering to the withdrawal schedule, depleting their investment in the underlying fund, and making annual insurance premium payments (accrued and paid out of the fund on their behalf). The withdrawal from the underlying fund (including shifting funds to another investment option) of amounts in excess of the prescribed retirement strategy may result in the reduction or forfeiture of Annuity Payments under the group annuity contracts issued by the unaffiliated issuing insurers and the forfeiture of premium paid to such insurers. JPMAM does not guarantee the obligation of the unaffiliated insurers to make lifetime income payments.

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