Design Options: Building Strong Retirement Plans

Retirement plan design is increasingly focused on getting employees enrolled sooner, keeping them in longer and providing more options for creating income people can rely on in retirement.

The design elements plan sponsors are considering include immediate plan enrollment, lowering eligibility age to contribute, larger arrays of product sets to accommodate decumulation and providing participants with nonguaranteed and guaranteed investments and options to support, converting their accumulated retirement savings into a paycheck in retirement. 

While defined contribution plans debuted in the 1980s as supplemental retirement savings plans, explains Holly Tardif, a director of retirement and retirement strategist at WTW, different plan design features are needed in 2024 as the remit of these plans has grown significantly and for most U.S. private-sector workers they are now their primary retirement savings vehicles.   

“When we think about the purpose of a DC plan [it’s changed and] some of the conversations that we’re seeing [about what] is the purpose of the DC plan [are] really now far broader than [DC plans were] ever intended to be,” explains Tardif. “[A DC plan] was originally meant to be the supplemental savings plan [to support retirement], and now it’s a primary savings vehicle, source of retirement income for many employees.”

For plan sponsors, pursuing their plan goals requires paying attention to many plan design features, including vesting schedules, eligibility to enroll in the plan and auto-escalation of participant contributions.

“With SECURE 2.0 and other legislation that’s come out, the question now becomes, how do you integrate financial resilience and wellbeing, and retirement income and all these things into plans?” Tardif asks. “[And] how do you communicate that to participants and do sponsors even want that flexibility in-plan is something that we’re having conversations with sponsors about right now.”  

With these trends and changes affecting plan sponsors “[they] have an opportunity to assess their plan to determine if they’re fully meeting their employees’ needs and if their employees are actually optimizing the benefits that are available to them,” explains Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies.

“The good news is the [Transamerica Center for Retirement Services] survey finds high rates of participation [and] it finds high contribution rates as expressed as a percentage of [participants’] annual pay.”

Plan Sponsor Design Trends

Different plan sponsors have, successfully, added new trends of plan design features to the benefit of the health of their plans. 

The City of Dunwoody, Georgia, recently lowered to 18 from 21 the eligibility age for employees to join the 401(a) and 457(b) plans. Participants are also able to contribute, beginning on the first day of their employment. The city changed the age threshold, after hiring an 18-year-old to work in public safety and because it hoped making the benefit available to younger workers would encourage more young people to apply for municipal jobs.

With average plan deferrals at the Michigan Office of Retirement Services 401(k), reaching 10.7%, the office raised its goal for average deferrals to 15% from 10%, capping the auto-escalation ceiling at the higher rate.  

Per projections by the plan’s recordkeeper, Voya Financial, 61% of the plan’s 401(k) and 457(b) participants are now on track to replace 70% of their pre-retirement income after they retire. The Michigan Office of Retirement Services added its Small Steps automatic escalation program, in 2016.   

The plan sponsor was an early adopter of auto-enrollment among government employers and already included auto-escalation, increasing participant’s contributions by 1% each year unless they opted-out.

In 2023, plan sponsor Wayne-Sanderson Farms—a top U.S. poultry producer—combined three retirement plans into one. The redesigned plan added auto-escalation and enrollment as well. 

With the redesign Wayne-Sanderson Farms’ 401(k) plan employees receive a 100% employer match of the first 4% of their eligible contributions, and they are automatically enrolled and escalated 1% each year up to 10%. 

The asset size of a plan correlates to the sponsor offering auto-enrollment, according to the 2023 PLANSPONSOR DC Plan Benchmarking Survey. It found that auto-enrollment is used by 22% of plans with assets less than $5 million; 45% of plans with assets between $5 million and $50 million; 66% of plans with assets between $50 million and $200 million; 67% of plans with assets between $200 million and $1 billion; and 70% of plans with $1 billion of assets or greater.

For sponsors, mulling over adopting plan design trends, including new features and investment options that include some kind of lifetime/retirement income or guaranteed income, each different employer examines the options based on the plan’s philosophy, says WTW’s Tardif.

Each employer considers the role of the employer and the role of the DC plan differently, she says.

“Some sponsors are going to still think about the DC plan as primarily an accumulation vehicle, and it’s not the employer’s responsibility to help transition that accumulated savings into … an income stream. But there are others—many others—who want to provide a secure retirement income and think the DC plan is a big piece of that solution,“ Tardif says.   

Changing the direction of travel of the DC industry-ship after it has left port, however, is no simple task, Tardif adds.

“Just saying you have option A, B and C, [isn’t enough because] plan sponsors have a really critical role to help show plan participants what their options are, the effects of their choices, and help them truly make the right decisions for themselves,” she explains.  

“DC plans have always meant to accumulate, and we spent a lot of time on that, as an industry, helping participants accumulate wealth, but not as much focus on decumulation,” she adds. 

For sponsors, starting the conversation with their participants about retirement income options by addressing Social Security claiming strategies is a good place to begin, explains Collinson.

“One [way] is through their plan provide education about Social Security benefits, how to how to think about them, how to plan for them and how to access the Social Security… website to keep track of their vested benefits,” says Collinson. “Plan sponsors can help do that. They can also provide ongoing news updates or education when there are any major developments about Social Security.”

Pam Hess, executive director of the DCIIA Retirement Research Center, agrees with Collinson, adding “people think [Social Security is] disappearing, and that if they don’t claim it now, they’re never going to get it, and that fear is doing them a disservice.”

Trends Specific to Decumulation

Retirement plan design trends and features to include options, supporting participants to secure retirement income, specifically are at a starting point with providers focused on developing products to incorporate into target-date funds.

The use of annuities with the design of DC plans to generate guaranteed income remains concentrated on products packaged as either default options for plan sponsors to position inside their qualified default investment alternatives, often within TDFs that serve as the QDIA.

For plan sponsors with nonguaranteed options, securing combined lifetime income or retirement income blends have focused towards in-plan design features like allowing systematic withdrawals, but those are not ubiquitous. The feature is ripe to be expanded because plans have not embraced partial withdrawals across the board.  

The retirement recordkeeping and investing industry is “at a good starting point with this kind of blunt force instrument approach,” says Yaqub Ahmed, co-head of U.S. investment-only business and global retirement strategy lead at Franklin Templeton Investments. “It’s a good … jumping off point, but there’s a lot of things we can do to advance it today, not tomorrow.”

In 2024, recordkeepers and asset managers have begun offering products and features to meet demand for retirement income or guaranteed income and launches are likely to continue at a robust pace as demand climbs. According to an internal survey of Voya plan sponsors clients, in the large corporate plan market segment, nearly half of sponsors have identified retirement income and income drawdown solutions as a critical area of focus. Also, the results of the 2023 annual participant research showed strong interest in retirement income services and solutions, says Laurie Lombardo, vice president at Voya Financial, responsible for leading development of new products and services for tax exempt markets. 

“From the plan participants who do not currently have such a solution, more than 70% of these plan participants are very or somewhat interested in retirement income plan options, with people of color showing even a stronger interest,” found the Voya Consumer Insights & Research, 2023 Retirement Plan Participant Experience survey conducted from June to July 2023 among 6,176 participants in employer-sponsored retirement plans managed by Voya.

Annuities Ahead?

Plan sponsors must beware of potential pitfalls, pursuing the option of adding in-plan annuities to offer guaranteed retirement income, says David Blanchett, managing director, portfolio manager and head of retirement research at PGIM DC Solutions.

“One potential issue with [adding] annuities in DC plans is you don’t know how many folks are going to actually annuitize and use the benefit,” he says.

For plan sponsors, Blanchett cautions, “If I’m a plan sponsor and I am going to include as a default, an annuity in the target-date fund, what percentage of my participants do I want to annuitize? Is that 20% is it 50% and then what happens if it’s only 1%?”

For plan sponsors who are determined to add in-plan annuities Blanchett is also concerned there are long-term implications, which cannot be unwound readily because annuities “are not as simple as a normal investment,” he explains.  

“If the [plan sponsor’s investment] committee [prior to the current leadership], for some reason, loved emerging market debt, [for example], but then the new committee hates it, you can just get rid of the fund: No big deal. If you’ve allocated to an annuity based upon the type of annuity, you can’t get rid of it as easily,” explains Blanchett.  

With in-plan annuities, sponsors are “creating something that’s very sticky longer term, which, again, …could be a very good thing, but just be aware of what you’re doing to make sure you’ve got every other kind of thing that’s easier already covered,” he adds.

Beyond Products

In-plan annuities are one way to provide participants with options to secure income in retirement.

For plan sponsors, “there’s hundreds or thousands of different ways,” to offer participants options to secure lifetime and retirement income—“embedded within” TDFs, with product launches to continue explains Blanchett.

Before adding annuities or other new features plan sponsors “need to look at their plan document” because “the plan document may not allow systematic withdrawals,” adds Lombardo. “The plan document may not even allow a partial distribution.”

For sponsors, using an outdated plan document may prevent additional features.

“That’s the best place to start, because modernizing the plan document to have some of these key features like systematic withdrawals and partial distributions—if you don’t have those—blocks the participants from doing any kind of paycheck conversion at all,” says Lombardo. “Plan sponsors can start simple, and then as they get comfortable, they can certainly add as they go.”

Focusing too narrowly on plan designs, using annuities and TDFs will “miss,” significant portions of plan participants because not every plan participant invests their retirement assets in TDFs, adds Drew Carrington, senior vice president and head of institutional DC at Franklin Templeton Investments.

“If you’re designing a solution that where the only way you can get income is inside a target-date fund, you may not be targeting the people who most need that because you’re going to miss them,” he explains.