While most DC plans offer tools and advice on achieving retirement objectives, retirement income solutions are still not commonplace and are not even among the top priorities of plan sponsors.
When plan sponsors were asked in a recent survey about their top three priorities over the next 12 months, 38% included evaluating retirement income solutions, although only 7% included it as the No. 1 priority, according to the survey by PGIM, the global asset management business of Prudential Financial.
PGIM’s The Holy Grail of DC: Income in Retirement study found that most sponsors (62%) did not rank retirement income solutions as a top priority. Instead, the top three priorities included evaluating compliance with regulations, increasing participation and deferral rates, and incorporating financial wellness programs, followed by reevaluating investment menus and reducing plan costs.
To better understand the current retirement income landscape within the DC space, PGIM surveyed more than 130 plan sponsors that have at least one 401(k) plan and a minimum of $100 million in 401(k) assets.
On the Menu
Not surprisingly, plan sponsors indicate stable value funds are the most common retirement income solution, with 54% offering them in their 401(k) 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.
About a quarter (23%) of survey respondents indicated they don’t offer any retirement income solutions as part of their investment menu. But due to the SECURE Act’s increased protections to offer annuities as an investment solution within a DC plan, the survey shows, a quarter of DC plan sponsors indicate they have greater interest in doing so. Plans with $250 million to $499 million showed the most appetite, with 36% either strongly agreeing or somewhat agreeing, followed by those with $1 billion to $5 billion (31%) in AUM.
Notably, larger plan sponsors (more than $5 billion) appear to be undecided (71%), while 33% of the smallest plan sponsors disagree that the SECURE Act has increased their desire to offer annuities in their 401(k) plans.
Plan Design and Communication
The findings show that the No. 1 step plan sponsors have taken to increase employee understanding of retirement readiness continues to be tools and advice on how to spend down in retirement, with 89% of total respondents saying that was their primary mechanism. The next highest response was communicating account balances to participants in terms of projected retirement income, with 66% of overall respondents choosing this option.
While nearly all plan sponsor respondents offer tools and advice on how to meet retirement readiness goals, PGIM suggests there is an opportunity for sponsors to review their plans’ available distribution types. For example, fewer than 50% of plans with assets between $100 million and $1 billion allow systematic withdrawals, while about a third of plans over $1 billion still do not allow systematic withdrawals.
The Future of Retirement Income
According to PGIM, the next generation of retirement income solutions should deliver guaranteed lifetime income in addition to non-guaranteed components that leverage asset allocation and asset-structure best practices, liability-driven investing concepts and institutional investments.
And in noting that enhancements are likely to coming in small steps, the report emphasizes that one way sponsors can further the process of providing opportunities for income in retirement is leveraging the power of technology to provide more customized, tailored advice and investment solutions for pre-retirees and retirees. “The passage of the 2019 SECURE Act had positive implications for plan sponsors and their participants as it relates to retirement income, said Josh Cohen, PGIM’s head of institutional defined contribution. “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.”
In fact, 72% of respondents said they strongly agree or somewhat agree that there will be a need for such solutions, while just 2% strongly disagreed. PGIM notes that the most support came from plans with $1 billion to $5 billion in assets, followed by plans with more than $5 billion.
