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TDFs as a Decumulation Solution?

Long utilized in DC plans to help participants save for retirement, target date funds have “untapped potential” to support retirement spending, new survey results suggest.

BlackRock’s latest DC Pulse Survey of 1,000 DC plan participants and 228 large DC plan sponsors (at least $300 million in assets) suggests that TDFs are increasingly considered as a potential source of retirement cash flow.

According to the findings, 57% of plan sponsors agree that their TDF can be used as a decumulation vehicle, while 45% actively encourage participants to look to TDFs for their spending needs in retirement. Moreover, 58% of sponsors agree that a TDF’s suitability as a decumulation vehicle is important when selecting a fund.

The report explains that TDFs have the potential to assist participants with a range of concerns by offering “downside protection to potentially dampen overreactions to down markets and they may help plan sponsors provide a common set of spending tools and a basis for strategic communication to manage concerns about retirement spending.”

In addition, the report notes that sponsors are more likely (39%) to direct participants to TDFs than to any other plan option when it comes to finding support for their retirement spending needs. Yet, the findings also indicate that sponsors do not yet view any of their options as a “focused” spending solution.

Most sponsors (93%) say their plan currently offers no investment options specifically designed to help retired participants address spending needs — suggesting that more focus may be needed on the sponsor side in retooling the TDF specifically as a decumulation option.

“Plan sponsors increasingly can deploy TDFs to help individuals spend their retirement savings in ways that make most sense given market conditions, actual spending needs and anticipated longevity,” explains Anne Ackerley, Head of BlackRock’s U.S. and Defined Contribution Group.

Optimism for Now

The survey findings also indicate that workers are increasingly optimistic about their retirement prospects. Fueled by strong stock market performance, 61% of DC plan participants say they are on track to retire with the lifestyle they want, while 90% say they are confident in their overall financial situation.

Employers don’t quite share that upbeat view, however, believing that more than half of their participants (54%) will be forced to delay retirement due to saving shortfalls. That percentage is up from 34% in 2016.

But despite their optimism, participants also have serious concerns about transforming their accumulated savings into an ongoing retirement income stream. According to the findings, 51% agree that “it’s difficult to know how my retirement savings will translate into monthly income at retirement” and nearly half (48%) say “the thought of having to generate my own retirement income worries me.”

Against that backdrop, they are looking to their employers for assistance. Nearly 90% of participants agree that their plan account should include an estimate of the annual dollar amount or percentage they could safely withdraw in retirement. By the same token, a nearly equal percentage of plan sponsors say their company feels responsible for helping to support participants’ retirement spending needs.

The survey “makes clear that plan participants want their employers to help them manage the saving-to-spending transition — and sponsors agree they need to deliver this help,” says Ackerley.

As a result, 83% of sponsors have taken some action to encourage participants to keep their assets in the plan post-retirement, with many adding retirement income investment options (35%) or providing guidelines on withdrawal rates (33%).

Yet, while plan sponsors expect about 50% of their participants to stay in the plan for part or all of their retirement, only half offer tools to help participants understand what they could draw down from their savings in retirement. (Another 33% say they are considering doing so in the future.)

Participation = Optimism

Fortunately, strong markets aren’t the only driver of participant optimism — active engagement with the retirement savings process also plays a significant role in shaping their view, according to BlackRock’s report.

Participants who feel they’re currently on track for retirement also attribute their success to saving the amount that allows them to get their employer’s maximum match (41%) and saving the maximum amount they possibly can at all times (34%).

“Securing their employer’s matching contribution — in addition to being a key confidence builder — offers employees significant motivation to save,” adds Ackerley. “Indeed, some sponsors are taking steps to build this motivation, with adjustments to the match that can encourage participants to save even more.”

According to the findings, 54% of sponsors over the past two years have made adjustments to contribution levels and investment options to support savings. Among the most popular adjustments were:

  • changing the company match for employee plan contributions (17%);

  • raising the default contribution rate (20%); and

  • selecting a new default investment alternative (18%).