Despite workers’ increasing requests for personalized retirement income solutions, a significant number of plan sponsors are either in the preliminary stages of learning about the various options or do not even consider it a topic of interest or need, new data from PGIM shows. 

After surveying 155 plan sponsors, PGIM’s study, “The Evolving DC Landscape,” found that while seven out of 10 plan sponsors have taken steps regarding retirement income, only 15% are currently evaluating products or implementing a solution. 

In addition, 27% of these plan sponsors said they are not currently interested in offering a retirement income solution. 

Mikaylee O’Connor, a principal and senior defined contribution strategist at PGIM and the author of the study, says DC plans have historically been viewed as a savings accumulation vehicle, not necessarily a total retirement solution that can address risks that retirees face in retirement. As a result, O’Connor says the inclusion of retirement income broadens the scope of work for many fiduciary committees.  

“[Offering a retirement income solution] takes a shift in thinking, it takes internal buy-in, and it takes additional education, so I think that’s where the hesitation comes from,” O’Connor says. “This is a long process. It’s not an easy decision, and it’s not easy to implement.” 

Among plan sponsors that do offer retirement income options, the majority use stable value funds and target-date funds as income solutions, even though PGIM argued that these investments are not designed to address the various financial and market risks that retirees face in retirement. 

“While target date funds have become the primary accumulation vehicle within DC plans, the challenge of solving for individuals’ retirement income needs will require more personalized approaches and continued evolution and innovation within the space,” the report stated. “Leveraging technology to bring more tailored advice and investment solutions will be critical.” 

O’Connor says managed accounts that are designed for retirement income and that can incorporate annuities if necessary will better help participants meet their spending needs in retirement because managed accounts can be personalized to “address the unique needs of individuals.” 

The study revealed that the most common retirement income solutions plan sponsors are considering annuities (in- and out-of-plan), long-duration fixed-income and managed accounts that support decumulation. Meanwhile, only 14% of plan sponsors agreed there is significant participant interest in adding in-plan annuities.  

PGIM’s report said the data suggests that plan sponsors need to gain a more holistic understanding of their participants’ retirement income needs as they chip away at the “retirement income challenge.” 

Access to Alternative Investments 

Most DC plan sponsors do not offer alternative investments as part of their target-date fund offerings, PGIM’s report found, even though research suggests a small uptick in usage and interest in the asset classes between 2020 and 2022. 

For instance, 82% of plan sponsors use an off-the-shelf TDF, and only six out of 10 plan sponsors offer a TDF that has some mix of active and passive management, according to the report.  

More plan sponsors have shown interest in offering alternative investments, but sponsors admitted hesitancy to offering investments other than stocks or bonds due to lack of participant education; operational challenges; and associated costs.  

Litigation risk, in particular, rose significantly as a top concern among plan sponsors between 2020 and 2022. However, actively managed investments are not the only targets of litigation. In 2022, several lawsuits were filed against large plan sponsors that had hired an all-passive target-date manager, the report noted, so simplified investments are not always immune to litigation either. 

Plan sponsors, consultants and investment managers are often the ones who provide access the gatekeepers to these alternative investments at more favorable institutional pricing, and according to PGIM, if there are suitable investments that are operationally feasible, plan sponsors and their advisers should explore these options.  

“To truly support participants’ retirement outcomes, DC plan sponsors should learn from their DB counterparts and take an ‘institutional approach’ that often includes a thoughtful mix of active and passive management, broad asset class diversification, and selective use of alternative investments,” the report stated. 

Facilitating Retirement Readiness 

The report also revealed that more than 60% of plan sponsors have not taken what the report deemed basic steps to increase their participants’ retirement readiness. 

Only 37% of surveyed plan sponsors said they allow participants to take systematic withdrawals at retirement, and O’Connor says this is “low-hanging fruit” that plan sponsors should implement.  

“You shouldn’t be having retirement income conversations until you can at least start taking [out] money systematically from your plan,” O’Connor says. 

Additionally, only 27% of plan sponsors said they help their participants set retirement readiness objectives and measure progress, and only 13% offer a Social Security optimization tool—which helps participants use their personal information to see how much income they will likely receive, based on when they start claiming Social Security. 

“Optimizing Social Security has not really been top of mind as a retirement income tool for DC plan sponsors, so I would suggest it’s pretty low-hanging fruit and should be promoted to participants because for the majority of individuals who are going to be retiring soon, Social Security is going to be their main source of guaranteed income,” O’Connor says. 

On the positive side, 83% of plan sponsors said they offer online tools to help participants figure out how to meet retirement readiness goals, 72% offer advice services, 69% offer financial wellness services and 61% communicate account balances in terms of projected retirement income.  

But O’Connor says there is still work to be done, and she argues more plan sponsors should offer advice services to improve participants’ retirement readiness. 

PGIM’s 2022 plan sponsor research was conducted from May 23 to August 26, 2022, using an online, quantitative approach to survey DC plan sponsors in the U.S. who have at least one 401(k) plan and at least $100 million in 401(k) assets.