T. Rowe Price Launches Retirement Income Product Evaluation Framework

T. Rowe Price has unveiled a framework to support defined contribution plan sponsors’ efforts to evaluate retirement income products.

T. Rowe Price developed the five-part framework, working from the premise that plan sponsors have lacked a common, unbiased method to support how to evaluate different retirement income products, states a press release.

“The interconnected nature of the 5-D framework examines and quantifies these tradeoffs that are uniquely inherent to retirement income needs,” said Jessica Sclafani, global retirement Strategist at T. Rowe Price, in the press release. “It offers a common method to compare and evaluate retirement income solutions.”

Whereas available tools that are focused on investments, during a participant’s savings accumulation phase are evaluated on two-dimensions—principally, the level of return versus level of risk—T. Rowe’s framework for the decumulation stage uses a wider range of goals to encompass the following:   

• Longevity risk hedge: Evaluate how many years retirement savings will last
• Level of payments: Quantify the amount of annual income generated
• Volatility of payments: Determine how much retirement “paychecks” can change from year-to-year
• Liquidity of balance: Quantify if a need arises, how much savings can be available to the retiree
• Unexpected balance depletion: Evaluate the risk of money running out earlier than planned

For plan sponsors evaluating the growing universe of retirement income products—in-plan retirement income, hybrid target-date funds, annuity supermarkets, managed accounts with retirement paychecks and systematic plan withdrawals—presents a challenge, explains Kevin Crain, executive director of the Institutional Retirement Income Council.

“Development of retirement income product selection tools like [T. Rowe’s framework], should increase plan sponsor comfort to add in-plan retirement income options,” Crain says.

Although retirement income options have proliferated in recent years, selecting a decumulation option from their defined contribution plans is a participant’s choice.

Less than one-tenth (6.7%) of plan sponsors offered an in-plan annuity option, and another 26% offered one via a managed account service, found the 2023 PLANSPONSOR DC Benchmarking survey.

With the number of retirement industry options available in the marketplace plan sponsors need tools to feel comfortable evaluating and selecting the right options for their plans, Crain adds.

“The T Rowe [Price] retirement income framework is an important advancement to give plan sponsors, and consultants/advisers, a tool to do that,” Crain says. “Development of retirement income product selection tools like this, should increase plan sponsor comfort to add in-plan retirement income options.”

T. Rowe Price referred to an an article, written by Scalfani and Berg Cui, senior quantitative investment analyst, titled “A five-dimensional framework for retirement income needs and solutions,” which explores the framework in detail and includes a hypothetical case study on how plan sponsors could apply it.

“Much of the retirement income research conducted to date focuses on identifying participant preferences, for example, ‘I want a guaranteed stream of income.’ However, it fails to consider the other side of the ledger, ‘I am willing to give up X% in monthly income’ to achieve that preference,” states Sclafani.

With more defined contribution plans considering a retirement income product, plan sponsors can benefit from research, accounting for inherent trade-offs in retirement income offerings, T. Rowe concludes.