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