Embracing a ‘Retirement Tier’ Framework

While many plan sponsors have flirted with the idea of offering retirement income options to plan participants over the past several years, any adoption of retirement income has only come in fits and starts.

Investment management firms and insurers have manufactured a number of retirement income products. What keeps sponsors from putting them on their investment menus is a lack of familiarity with the various options and a hesitation to offer them because sponsors don’t know if retirees will actually select them, Lorie Latham, vice president, defined contribution (DC) strategist, at T. Rowe Price, tells PLANSPONSOR.

However, sponsors are going to have to offer retirement income solutions if they want their aging Baby Boomer workers to retire, argues Peg Knox, chief operating officer (COO) of the Defined Contribution Institutional Investment Association (DCIIA). According to the U.S. Census Bureau, there will be 73 million people age 65 and older by 2030, up 50% from 49 million in 2016, Knox points out in an opinion piece for PLANSPONSOR.

“The ‘retirement tier’ basically allows a DC plan sponsor to broaden the plan’s goal from one wholly focused on savings to one that also accommodates and supports participants who are near, entering or in retirement,” Knox says.

That is why T. Rowe has developed a framework for building a retirement tier, Latham says. It helps sponsors look at the demographics of their plan, understand the needs and financial goals of the retirees in their plan, and then points them in the direction of the tools and asset management and insurance products that might make the most sense, she explains.

Included in the framework is a worksheet that queries sponsors about their workforce.

“It asks sponsors what they are motivated by, what they are hearing from their workforce and what they might be interested in from an income perspective,” Latham says. “It gives us a sense of their hierarchy—and what, specifically, they are trying to solve for. We don’t think this approach has ever been suggested before. We do quite a lot of studies on plan sponsor insights and participants. Time and time again, retirement income and duration [i.e., longevity risk] keep popping up as having the highest [concerns]. We look at retirement income and duration, that is, not outliving your assets, as bookends” in the quest to offer retirement income solutions.

Multiple Suites of Solutions

T. Rowe Price believes the correct approach is “multiple suites of solutions,” Latham says.

Participants “are going to need more than one thing, and sponsors shouldn’t dismiss things such as growth, income and volatility” as they use the framework, she says. Keeping those factors in mind “is really important for plan sponsors who want to journey into retirement with their participants.”

When the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in 2019, “sponsors were curious about the legislation,” Latham says. The additional safe harbor it spelled out for sponsors in selecting an insurer with an annuity “cleared the path that had some of the hurdles—but it got a tepid response.”

That is how Latham and her colleagues at T. Rowe Price got the idea to take a new approach, or, as she puts it, “come at it in a new way.” This starts by asking sponsors, “Who, in the retirement plan, are you solving for?” If the answer includes some participants who are retirees, then the solution might help them consider retirement income product decisions.

Having worked as director, DC strategy lead, for 10 years at Willis Towers Watson, Latham joined T. Rowe five years ago to help the firm “put clients first, always.” As the T. Rowe team engaged with clients to streamline their 401(k) plans, Latham says it led her to step back and ask, “Why aren’t we doing this for retirement income?”

Annuities Aren’t the ‘Starring Role’

“We as an industry push products,” Latham says. But as individuals enter retirement, their “retirement objectives and needs are very complex to think about. We know that plan sponsors and their committees are making important decisions on behalf of their participants.”

Guiding them through the important considerations that come up for participants in retirement can be helpful, Latham says. “That is where we landed on pushing this mindset,” she notes. “It doesn’t have to be done overnight, and annuities don’t have to have the starring role.”

T. Rowe’s framework can “put some teeth on that, for the sake of constructing a portfolio that can meet the needs of your workforce,” Latham says.

In particular, retirees’ spending patterns change over time. Participants need help to be smarter about what they are doing with their assets in retirement, she says.

“One of our researchers did a study on discretionary and nondiscretionary spending” and looked into whether retirees are interested in guaranteed income, Latham says. As to the widely held idea that people don’t want annuities, she says, “The reality of that is, it is a myth” and that if they are offered guaranteed income, people are adaptable and enjoy raising their nondiscretionary spending. Participants are all different, particularly as they get older and move closer to retirement. With the framework, “personalization becomes front and center,” she says.

As T. Rowe Price rolls out its framework, starting with sponsors of the largest plans, the firm realizes adoption of it and retirement income “won’t be easy or fast,” Latham says, “but it sets up a sensible infrastructure that can be documented and creates faith for sponsors that they can make decisions that give them a little bit of protection. Let’s create the movement and move the needle [and] completely shift the conversation and move forward on how to leverage the QDIA [qualified default investment alternative].”

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CALL TO ACTION: Retirement Tier Action Steps

T. Rowe Price lays out five action steps sponsors can take to get the retirement tier ball rolling.

1. Embrace a beyond-product mindset. To better tackle the challenge of retirement income, don’t start with a product. Lead with identifying what you hope to solve first, and define your objectives.
2. Start with an evaluation framework. Design a framework based on plan objectives, capabilities and aptitude for adoption and change, as well as participants’ preferences and needs.
3. Consider a suite of offerings. Don’t overlook the range of available retirement income solutions. Likewise, don’t underestimate what may already be on your platform. Some investment options may be repositioned as retirement income solutions, and some new investment options can be pursued.
4. Build a blueprint. It doesn’t have to be done all at once. Embrace a timeline and phase in solutions when you can.
5. Take participants on the journey with you. Journey planning requires engagement and understanding. Build a philosophy and engagement platform that sets participants up to successfully use retirement solutions that you make available.

Source: T. Rowe Price. DCIIA also has a series of white papers on the retirement tier that can be accessed here.