Next for Defined Contribution: Protected Retirement Income

After a decade of surveying participants—and plan sponsors in a few of those years—we've seen some key trends and learnings. What are they? Participant sentiments about saving have remained constant, as has their need for help from advisors and employers. Except now the focus is turning. As the first generation of 401(k) investors are retiring, the rubber is hitting the road. And their views about secure retirement income are marked by three significant terms plan sponsors and their advisors should note: Insurance. Flexibility. Control.

Recurring Retirement Trends

Before we explore our new income findings, let’s review trends that continue to resonate, and a few new views uncovered in our 10th anniversary study.

Auto Everything to Help Me Save

Plan sponsors have also gotten the message. Early objections of not wanting to appear paternalistic have long fallen by the wayside as participants understand how plan defaults help them save more. Sponsors see the real costs of continuing to employ those who aren't prepared to retire. Those costs can be seen in increasing health care premiums and financial stress, including the emotional strain that can drain employee productivity.

The real bottom line: Plan sponsors know it's the right thing to do and realize that, in many cases, deciding not to default employees into the plan means essentially defaulting them into saving 0% and potentially putting their financial future at risk.

Retirement Plans and the Employer Contribution Still Rule

Participants consistently place a high value on their retirement plans. Even with high student loan debt, they (including millennials who may be dealing with it the most) still prefer help with retirement contributions over assistance with educational costs.

The best part of their plans? It's still the employer match. We stopped asking about the match in our research because participants consistently chose it over a raise. Plan sponsors also understand the value of offering a robust retirement plan that can still be a tiebreaker for potential employees if all things are equal.

TDFs: Risk Management Now Key

Our research showed that plan sponsors are true believers in the potential target-date funds (TDFs) have to address risks: market, growth, longevity and inflation/interest rates. Given today's environment, most consider inflation and interest rate risk the most important. Participants also named inflation and rising rates as top concerns, beating out the decade-long top two worries of outliving their money and market volatility.

Protecting against losses is also key for plan sponsors. When asked, "Would you rather" about TDFs, two-thirds prefer one that helps most participants protect their savings from significant losses, even if it means waiting out periods of underperformance. One-third still want outperformance, even if it means waiting out significant volatility and potentially large losses.

Next Stop: Secure Retirement Income

In our study, 95% of plan sponsors agree employees need help turning their balances into reliable income, and 94% say they should offer income features. Here are key points for advisors in discussing guaranteed income options with plan sponsors.

Add Income to Existing Investments

Some two-thirds of plan sponsors say they would rather have a guaranteed income option in an existing investment, such as their TDF, likely because participants are already familiar with them, making it easier to explain the new benefit. Only one-third are interested in a completely new investment with the same income feature.

'Insure' All My Balance

Three-quarters of participants feel it's at least very important to protect all their savings in the event of a market crash. I liken it to what we all want from homeowner's insurance—to cover the whole house, not just the kitchen or bathroom. In the event of a catastrophe, would we complain that we paid for coverage of our full balance if our loss was "just" 50%?

Guaranteed income is like insurance for a participant's retirement savings. Only now, we're insuring against a potential market drop right before or after retirement or simply being too healthy and living too long—all of which could be catastrophic to their savings.

Let Me Control My Retirement

Three-quarters of participants want 100% control and flexibility with their accounts after retirement. And twice as many chose 5% lifetime income with no limitations on the ability to make changes to the amounts or to withdraw a lump sum over 6% income with less control and the ability to make changes.

Automatic Income Defaults—The Next Debate?

Will we or won't we default participants into guaranteed income? This feels very similar to the should participants be defaulted into target date funds debate of 15 years ago. Personally, I'd like to take what we learned from those discussions and apply it to the next chapter. Because it's the participants who have smaller balances and typically don't work with an advisor who could benefit the most from guaranteed income. Can they afford to wait while we deliberate?

Let’s Not Leave It to Luck

As the focus for retirement shifts to needs for guaranteed income solutions and protecting savings, advisors and plan sponsors should consider their options. The next journey for retirement necessitates helping participants navigate the retirement transition with the financial security and control they want over their savings—rather than leaving it to the luck of being born in the right year, saving the right amount and retiring at exactly the right time.