How Plan Sponsors Can Shift Focus to Decumulation

Defined contribution plans were designed to focus on the accumulation of assets. Yet many retirees today are struggling to figure out how to transform that accumulated wealth into a workable income stream that will last them through retirement.

Plan sponsors have an opportunity to offer a variety of in-plan benefits for retirees—from guaranteed lifetime income products to vetted advisory services—that are not as simple to obtain in the retail market. However, many plan sponsors are still hesitant to offer these solutions.

A recent survey conducted by PGIM found that of 155 plan sponsors, only 7% said they are implementing (or have already implemented) a retirement income solution or product. In addition, only 5% of plan sponsors said they currently offer in-plan annuities.

Mikaylee O’Connor, a principal in and senior defined contribution strategist at PGIM, argues there are four primary benefits that plan sponsors can offer to retirees within a DC plan: fiduciary oversight, institutional investments, annuity due diligence and vetted advisory services.

“Fiduciary oversight is often very much overlooked,” O’Connor says. “It’s a really important benefit for all participants, but specifically for retirees. Fiduciaries are responsible for oversight of plan providers, so they are responsible for making sure they have the right plan adviser [and a] cost-efficient recordkeeper.”

If a retiree does not stay in-plan, O’Connor says they have to take on that fiduciary responsibility themselves, vet advisers and select the best investments or annuity products on their own. This can be a daunting, and risky, task to take on without fiduciary oversight from a plan sponsor.

O’Connor says participants that stay in a retirement plan can gain access to certain kinds of institutional investments and fee levels that they would not be able to get outside of the DC plan. This includes lower-priced collective investment trusts, custom separate accounts and even lower-fee mutual funds.

Annuity due diligence and oversight are areas O’Connor believes need to be implemented by more plan sponsors. As a fiduciary, a plan sponsor is required to follow a prudent process to evaluate annuity providers, and plan sponsors can provide access to institutionally priced lifetime income solutions. O’Connor says this provides a significant fee benefit to participants.

Lastly, O’Connor says plan sponsors have the power to negotiate lower fees with advisers and to vet advisers, both reasons retirees might want to stay in-plan.

One of the 7%

Like many other plan sponsors, at first Carl Gagnon—assistant vice president of global financial well-being and retirement programs at Unum, an insurance company based in Chattanooga, Tennessee—was hesitant to add decumulation vehicles to his company’s retirement plan.

He says Unum used to encourage people to work with its recordkeeper, Fidelity, or go into the retail market to come up with a solution to help draw down their 401(k) assets throughout their retirement years. But Gagnon says this attitude has since changed, and the company decided to add a retirement income solution about two years ago.

Gagnon explains that Unum allows participants to take assets from their 401(k) plan and move them into managed retirement accounts that are like a “reverse target-date fund” and are designed to be used as a drawdown solution. Gagnon says a participant can put part or all of their 401(k) assets into the managed account.

Additionally, Ben Roberge, Unum’s director of financial and retirement programs, is currently working on implementing an annuitization program.

“In addition to the drawdown, we also want to make sure that people have the ability to create an annuity that pays a good portion, if not all, of [a participant’s] day-to-day expenses [and] their living budget in retirement,” Gagnon says. “Then [they can] use the drawdown for more discretionary spending.”

Gagnon says Unum expects to have a portion of that solution in place in 2024.

Roberge adds that Unum froze its defined benefit plan in 2013, so the portion of the company’s employee population that had access to guaranteed income via the pension fund continues to dwindle as more people retire and the company brings on new employees.

“We think that [guaranteed income] is an important piece as an option for employees, so we’ve been looking at a bunch of solutions for the better part of the past two years and really worked with our fiduciary committee,” Roberge says.

The Retirement Tier Concept

While consultants say there has not yet been much uptake of this solution among plan sponsors, the concept of a retirement tier is a strategy that 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.

The Defined Contribution Institutional Investment Association published a series of white papers in 2019 on the topic, writing that a retirement tier can be simple or detailed and is not an “all-or-nothing” proposition.

Plan sponsors interested in adopting a retirement tier that entails a modest commitment could, for instance, adjust their plan documents so that participants can simply stay in the plan after retirement and take partial distributions, DCIIA explains.

Other plan sponsors interested in offering a more detailed retirement tier could add retirement income options in-plan, as well as provide access to options outside of the plan, such as institutionally priced annuities or other insurance-based strategies.

In general, there are no “hard and fast rules” for building a retirement tier, according to the DCIIA.

O’Connor says a retirement tier is simply the recognition that retirees and those approaching retirement have different needs than younger employees, and a plan should offer a variety of solutions and services to accommodate those needs.

“Whether you are an employee or retiree, you would still have access to all of the same information and investment solutions,” O’Connor explains. “It’s just certain resources and investments would be more suitable to those approaching retirement. You can’t really restrict or provide certain access to different populations of your participants.”

David O’Meara, the head of defined contribution investment strategy at Willis Towers Watson, says a retirement tier can include additional investment products to better support a retirement income stream or could simply include systematic distribution of assets with no lifetime income guarantee attached to it.

But O’Meara says it can be difficult for plan sponsors and their recordkeepers to monitor so many different solutions.

“The difficulty with having multiple solutions is that the plan sponsor, recordkeeper or other third parties need to be involved to help guide participants to utilize the different options available to them,” O’Meara says. “When individuals get to the point of retirement, their financial picture can be quite complicated in terms of what investments are in their defined contribution plan. … It’s important for any of these solutions to have an advice or guidance component around it to ensure that the right people are electing the right products or solutions that ultimately meet the needs of [a retiree’s] total financial picture.”

Patrick Wisdom, a vice president and associate defined contribution consultant at Callan, says he has not seen many plan sponsors that have built out a retirement tier yet, but there is interest among plan sponsors to implement solutions like an annuity shopping service, as well as different distribution withdrawal options into a plan.

Starting to Offer Decumulation Solutions

For plan sponsors just starting to consider implementing a retirement income solution, consultants say some strategies are “low-hanging fruit” that employers can easily take advantage of.

O’Meara says many plans still force participants out of the plan at a particular age or upon separation from the company. There are also plan provisions that require participants to take all of their assets out of the plan in order to facilitate a steady distribution of payments.

“[These are] big barriers, [and it’s] low-hanging fruit [to] allow participants to stay in the plan and allow them to take their assets out of the plan at their discretion or set up systematic distributions,” O’Meara says.

In Callan’s most recent DC survey, 80% of plan sponsors said they already allow for in-plan systematic distributions. Wisdom says this is one of the most prevalent tools he is seeing plan sponsors offer.

On the investment side, Wisdom says some products readily available to help participants drawn down their assets are a retirement income vintage of a target-date-fund suite, stable value funds, and money market options, which all contain lower risk than a pure equity investment.

O’Meara adds that plan sponsors can improve their communication to participants at points of transition. Simply explaining to participants that they can keep their assets in the plan even if they leave the company is important because some participants do not realize that is even option, he says.

Room for Growth

PGIM’s survey found that 75% of plan sponsors are offering advice services, but O’Connor says participants need more than just asset allocation advice.

“Retirees are struggling with how to turn their wealth into a workable income stream that lasts throughout retirement,” O’Connor says. “This type of guidance and advice is really missing from most DC plans today.”

The most common way retirees are determining their withdrawal rate is based on the annual required minimum distribution levels, according to O’Connor.

“I think we need to do more than that,” she says. “We need to give retirees more holistic advice. … Advice, solutions, guidance [and] education need to really expand to consider when the household should take Social Security, how to structure the taxable versus tax exempt assets, how to be flexible with spending and withdrawal based on what the market is doing. It’s a much more complex conversation that I just don’t think most DC plan sponsors or even DC plan services are providing today.”

O’Connor also believes plan sponsors need to design a better investment menu for retirees who are looking for more diversification, downside protection and inflation-hedging asset classes.

“As DC plans transform over time to really become a true retirement plan, we also have to think about evolving the investments and making sure there are the right types of investments for retirees,” she says. “I think it’s the combination of a lot of these [income solutions] which are going to make plan sponsors more successful at retaining and actually providing the right benefits to retirees.”