Don’t Forget Decumulation: 3 Key Pillars for an Effective Retirement Income Solution

Dan Hunt

Defined contribution plans, such as 401(k) or 403(b) plans, hold a substantial portion of American retirement assets. While these plans are effective for helping employees accumulate retirement savings, there is a growing need to support employees as they seek to translate those asset pools into a sustainable income during retirement. This is known as creating a decumulation strategy.

Proactively addressing this need can distinguish an employer. As more employees approach retirement, devising effective strategies to fill the gap between the accumulation and decumulation phases will become a critical component of their financial health. Thoughtful product selection, comprehensive participant education and robust supporting resources may transform a fiduciary challenge into a strategic business advantage.

The Decumulation Challenge

The transition from saving to spending in retirement is  the key pivot point in terms of financial strategy and it is a significant adjustment. Accumulation is a relatively straightforward concept for which most DC plans have available well-diversified turn-key investment solutions that participants can rely on if they’re not sure how to manage their contributions. For decumulation, a large number of more complex considerations are at play, from the importance of health status, spousal age and income differences to Social Security and associated claiming strategies, to the broader household balance sheet including additional pools of savings. Careful planning is essential to help employees navigate the complexity and avoid common risks throughout the spending phase of retirement, that can lead to outliving one’s savings or succumbing to market volatility impacts at the wrong time.

While many recordkeepers are beginning to introduce proprietary income products, the gap between the availability of mutual funds and ETFs and retirement-income products remains wide. This can make retirement-income products a key differentiator for workplace plans: Offering structured retirement-income solutions provides a much-needed service, which can help enhance employee well-being and satisfaction. And at the same time, employers and employees stand to benefit from increased retention of assets within the company’s retirement plan, which can lead to better negotiating leverage with providers.

Yet organizations face significant challenges in integrating retirement income products, like annuities and flexible managed payout products, into their offerings. More complex and sometimes less liquid, these products require careful evaluation, and many existing recordkeeping systems were not designed with them in mind—presenting administrative challenges for plan sponsors seeking to ensure seamless integration and compliance.

Three Pillars for Effective Decumulation Strategies

To address these challenges and capitalize on opportunities, focus on three key pillars: product selection, participant education and planning support. Each plays a vital role in constructing a robust retirement offering that not only meets fiduciary standards but can also help enhance employee satisfaction and retention—enhancing your value proposition to current and prospective employees and contributing to a more financially secure future.

1. Decumulation-Specific Product Selection and Monitoring: Understanding the unique characteristics and needs of your workforce is key to choosing and implementing retirement income solutions that are a good fit your organization. Selecting and monitoring retirement products requires balancing employee needs with feasibility and suitability, keeping in mind the potential need for adjustments due to administrative changes. One size does not fit all, and it’s important to gather data on factors such as individual retirement age, investment savvy, and risk appetite, alongside broader demographic factors such as income levels and financial literacy. Integrating insights from other financial benefits you offer, like HSAs and life insurance, is also vital, as these can influence retirement planning strategies.
2. Participant Education and Engagement: Remember that whatever retirement products and tools you offer are only as effective as your employees’ ability to use them. Successful decumulation planning requires ongoing education and engagement around how personal circumstances affect investment choices and withdrawal strategies. Tailored education can empower employees to make more-informed decisions that optimize their retirement income. Go beyond product details to provide broader guidance and resources on key themes such as managing withdrawals, understanding tax implications and optimizing Social Security benefits.
3. Planning Support and Tools: Providing participants with tools, like retirement spending calculators and Social Security optimizers, along with personalized support, can significantly enhance their ability to manage retirement income. Whether through financial advisers or digital platforms that simulate various retirement scenarios, it’s important that support is proactive and adaptable to market shifts and individual needs. A robust support system not only simplifies retirement planning for participants, improving outcomes and satisfaction—it also eases the burden on plan sponsors. Equip employees with the knowledge and tools they need to improve their financial well-being.

A Competitive Advantage: Retirement Income Solutions in Demand

Recent research, including Morgan Stanley’s 2024 State of the Workplace report, reveals that robust retirement benefits can significantly influence an employee’s choice to join or remain with a company. In fact, 91% said they would consider changing or keeping their jobs to gain access to the financial benefits they want, underscoring the strategic potential for businesses to harness decumulation strategies to help boost recruitment, retention and overall employee satisfaction.

Embracing and implementing decumulation strategies can help enhance your value proposition to current and prospective employees, helping you to attract and retain top talent while fostering a more financially secure workforce.

Dan Hunt is a senior investment strategist and head of retirement solutions and investment tools for Morgan Stanley Wealth Management. He is responsible for developing many of the macro, asset allocation and manager analytics frameworks that Morgan Stanley institutional consultants use to help their clients formulate and implement investment policy. He also publishes extensively on the retail investing challenge as it pertains to retirement and partners closely with the firm’s financial planning team.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.