The defined contribution (DC) retirement plan market has been extraordinarily successful in encouraging working employees to save for retirement through vehicles such as 401(k) and 403(b) plans. However, the system falls short in helping participants navigate the oftentimes daunting decumulation phase in retirement, long after participants leave the workplace. Yet it’s not for a lack of effort.
Many retirement plan providers, investment managers, plan sponsors, advisors and regulators have been experimenting with different retirement income solutions for years. But the industry has yet to reach a consensus on the best decumulation approach—assuming there is one “best” solution at all. If today’s retirement income solutions are truly designed to meet the needs of plan participants, why are the solutions struggling to gain a foothold within DC plans? In our upcoming white paper, “Solving the Retirement Income Challenge,” we offer insight into the lukewarm reception of current retirement income approaches despite the universally recognized need.
On top of the industry’s reception of these solutions, there are outside factors and immediate and ongoing hurdles in the DC landscape at play. For starters, the DC industry is in an unprecedented period of upheaval. Baby Boomers, at roughly 72.5 million strong,1 are retiring at a rate of 10,000 per day.2 This equates to a historic outflow of retirement funds from DC plans every year over the next two decades. Plan sponsors, DC advisors and financial providers must adjust to serving the evolving needs of this massive generation while ensuring both workforces and businesses remain profitable for years to come.
Additionally, the regulatory environment presents its own challenge, with many DC plan sponsors nervous about the fiduciary liability associated with offering retirement income options within DC plans. To address these concerns, the US Congress passed the SECURE Act in December 2019, which includes a fiduciary safe harbor provision for plan sponsors offering participants a lifetime income option in their DC plans. This optional provision protects sponsors “from liability for any losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract.”3
The onerous reporting and administration requirements for offering guaranteed retirement income options in DC plans are another reason many plan sponsors appear to be shying away from these solutions. Including a guaranteed retirement income component adds complexity to an already overwhelming set of responsibilities.4
To top it off, key constituents in the retirement plan ecosystem are sending mixed messages regarding retirement income. Our latest research with plan sponsors, DC advisors and plan participants reveals that these three stakeholders have a diverse range of wants and needs. And despite a robust mix of retirement income options, including annuities, managed accounts, managed payout services, target-date funds that convert to managed accounts, and automated or systematic payout services, the DC marketplace has yet to create a viable solution that meets the needs of all participants.
Our upcoming white paper will take a 360-degree look at the in-retirement income ecosystem through the viewpoints of three sets of stakeholders—plan participants, plan sponsors and DC advisors—to assess the potential of these solutions within the DC landscape. We’ll examine the current appetite for retirement income solutions across all three audiences as well as dig into these barriers that industry leaders are facing. Send us a note and let us know if you’d like the paper when it publishes.
1 “Retiring Baby Boomers Won’t Destroy the Stock Market,” Reuters, May 15, 2019.
2 Friedberg, Barbara A., “Are We in a Baby Boomer Retirement Crisis?” Investopedia, updated September 23, 2019.
3 “The Setting Every Community Up for Retirement Enhancement Act Of 2019 (The Secure Act),” House Committee on Ways and Means, U.S. House of Representatives, accessed from Web, December 3, 2019.
4 “Administering Your Employee Retirement Plan Benefits,” Wolters Kluwer, accessed from Web, December 3, 2019.