Adoption of retirement income solutions within defined contribution (DC) plans hasn’t happened at the rate many thought possible, but the tide may finally be turning, according to one organization.
In its annual list of top retirement industry trends to watch in 2024, the Institutional Retirement Income Council (IRIC) says it expects a growing number of plan sponsors to evaluate and adopt retirement income solutions and de-accumulation strategies for their DC plans.
“The biggest trend we anticipate for 2024 is plan sponsor interest in exploring retirement income solutions for their DC plans,” said Michelle Richter-Gordon, executive director of IRIC, which is a non-profit think tank for the retirement income community. “In fact, we might be at the tipping point when it comes to the adoption of retirement income solutions within a DC plan,” she adds.
Richter-Gordon points out that traditional pension plans, which provide a guaranteed income stream in retirement, have become less common in the private sector. “With the rise of DC plans such as 401(k)s, the responsibility for retirement savings and investment decisions has shifted from employers to employees. As a result, there's an increasing recognition of the need to help participants convert their accumulated savings into a reliable income stream during retirement,” she explained.
In fact, enactment of the SECURE Act in 2019 was intended to, among other things, help facilitate the adoption of retirement income solutions in DC plans, but so far there has been a lukewarm take-up rate for various reasons, including lingering fiduciary concerns and a purported lack of interest by participants.
That said, the results of a recent LIMRA survey of private-sector plan sponsors with at least 10 full-time employees show that roughly half (49%) of those that do not offer an in-plan annuity in their DC plan say that they have considered adding one at some point. What’s more, about 3 in 4 claim that they will make this decision within the next 12 months, underscoring the increasing focus on these options over the past year.
Meanwhile, other LIMRA research shows there has been an increase in workers’ willingness to convert assets into lifetime-guaranteed income, which has increased 14 percentage points from 38% in 2017 to 52% in 2023.
As to trends to watch in 2024 that may help boost interest in retirement income solutions, IRIC identifies the following developments.
Increased focus on retirement readiness: Plan sponsors are becoming more concerned about the retirement readiness of their employees. Offering retirement income solutions within DC plans aligns with the broader goal of helping participants achieve financial security in retirement, rather than just accumulating a lump sum.
Market Innovation: The financial industry has responded to the demand for retirement income solutions by developing new products and investment strategies. IRIC notes that this includes the growth of both guaranteed and non-guaranteed solutions and other investment options designed to provide a predictable income stream in retirement.
Growing participant demand: Participants themselves are expressing interest in solutions that provide more certainty about their financial future in retirement. Many employees appreciate the idea of having a reliable income stream, and plan sponsors are responding to this demand.
Customized investment solutions: Plan sponsors may explore more personalized and customized investment solutions, including target-date funds and managed accounts that take into account not only individual employee circumstances and risk tolerance, but also their retirement goals and retirement income needs, the organization further suggests.
Further consideration of automatic features: Plan sponsors will explore (or consider) incorporating automatic features in their investment menu that include a retirement income component. For example, to what extent can a target date fund with a retirement income component serve as the QDIA? This follows the large number of plan sponsors that have already added automatic enrollment and escalation features to their plans, helping workers not only participate in DC plans, but to save enough to fund a secure retirement, says IRIC.
Increased employee education and communication: Finally, the organization points out that research shows that plan participants are looking for help from their employer when it comes to saving and planning for retirement. “To this end, we expect plan sponsors will make education and employee communication about retirement plans a high priority in 2024 and beyond,” the organization concludes.
