With an increasing number of plan sponsors apparently wanting to retain plan assets post-retirement, retirement income initiatives in 401(k) and other defined contribution (DC) plans have increased in recent years.
According to a 2022 Cerulli survey of DC plan consultants, including both retirement-focused registered investment advisor (RIA) aggregator firms and institutional consultants, 58% of their plan sponsor clients are either actively seeking to retain participant assets post-retirement or prefer to do so.
Of this percentage, 16% of consultant-intermediated plans actively seek to keep retiree assets in-plan, and another 42% prefer to keep retiree assets in-plan. When looking specifically at plans intermediated by institutional investment consultants, Cerulli found that 35% actively seek to retain retiree assets and an additional 40% prefer to retain retiree assets but do not actively seek to retain them.
As a result, asset managers have responded to this perceived demand and asset-gathering opportunity with increased decumulation product development and distribution efforts, the firm notes in the latest issue of The Cerulli Edge—U.S. Monthly Product Trends, which analyzes product trends as of May 2023.
Target-date funds (TDFs) that include investments geared toward producing investment income have received much attention, as have annuities and insurance guarantees of various types. However, other activity has been directed toward the development of nonguaranteed solutions constructed outside a TDF structure, the report notes.
According to Cerulli’s 2022 survey of DC plan recordkeepers, the retirement income products most offered on their platforms are TDFs with a retirement income vintage (67%) and an investment product with an annuitization component (50%), including a TDF.
Standalone products are seen less often, the firm notes. Availability of these solutions on recordkeeping platforms is mirrored by development and distribution efforts. Of DC asset managers, 57% offer a target-date fund with a retirement income vintage, and 20% offer a TDF with an annuitization component.
Specialized Offerings
Meanwhile, more specialized retirement income offerings—such as managed payout funds (17%) and retiree-focused equity products (11%)—are less common. That said, industry activity in recent years shows that more attention is being paid to these non-TDF solutions, Cerulli emphasizes.
In fact, managed payout funds currently are among the least offered solutions by asset managers (17%) but saw the greatest percentage increase in use compared to 2021 survey results (10%), the report shows.
To that end, Cerulli notes that, in 2019, T. Rowe Price launched a managed payout feature for DC plan participants, which targets a 5% annual distribution rate—higher than the 4% distribution rate typically seen in similar products. According to the report, this was intended to help investors “avoid regret” from spending too conservatively in retirement while still operating within safe withdrawal rate guidelines. “This type of investment policy decision highlights one way for asset managers to differentiate their products from others available in the market,” Cerulli observes.
Other asset managers, meanwhile, are looking to liability-driven investing (LDI) principles used in defined benefit plans to provide participants with retirement income options. For instance, LGIM America in 2022 launched its Retirement Income 2040 Fund. Cerulli notes that this product is intended specifically to generate income during an investor’s early-to-mid years of retirement, leveraging LGIM’s expertise in LDI management. A longer duration solution apparently is in development, according to the firm.
Efforts Abroad?
In looking abroad, retirement income efforts in DC plans may point to developments that could be seen in the U.S. market in years to come, the report further suggests. As an example, Tontines—which are risk-pooling vehicles that operate like income annuities but offer no guarantees—are now being offered to Canadian retirement investors.
Efforts such as these among DC plan asset managers seek to address competing investment preferences expressed by participants, Cerulli notes. Based on a survey of affluent households (i.e., those with investable assets of $250,000 or greater) conducted in 2022 and 2023, in addition to sustainable income, investors want their retirement portfolios to accomplish other goals:
- 59% want their retirement income plan to allow for the ability to withdraw excess funds when needed;
- 56% want their portfolio to have growth potential even after beginning account withdrawals; and
- 42% want the ability to change their investments in the future.
“As asset managers continue to navigate around the desires of the participants and plan sponsors they serve in addition to volatility in capital markets and interest rate policies, the ecosystem of retirement income solutions within DC plans will continue to evolve,” Cerulli says in a concluding observation.
