Data and Research July 8, 2024

Plan Participants Expect to Work Past Age 65

For plan sponsors, retaining older workers will require greater attention to plan designs that support workers at older ages.

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Defined contribution plan sponsors have opportunities to support their plan participants with plan designs that facilitate those working at older ages and with features to support workers as they transition to retirement, according to Transamerica’s “The Multigenerational Workforce: Life, Work, and Retirement” report.

Workers planning to work past age 65 or to work in retirement overwhelmingly cited financial (80%) and healthy-aging (78%) reasons, the survey found.

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“Plan sponsors 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,” says Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies and one of the report’s authors. “There’s still more work to be done to ensure that participants are taking full advantage of what’s available to them, as well as addressing new needs.”

Heidi Cho, a senior research content analyst at the Transamerica Institute, was Collinson’s co-author.

Age-Friendly Employers

For defined contribution retirement plan sponsors, equipping DC retirement plans to support the needs of participants will help distinguish employers as “age-friendly,” as described in the survey, in what could be a contrast with their competitors.

For sponsors, stronger age-friendly workplaces have a “vital role in the evolving world of work” by enabling work arrangements and providing training and tools for employees of all ages to succeed as contributors, the survey found. Almost seven out of 10 (69%) survey respondents considered their employers “age-friendly.” Generation Z (66%), Millennials (70%), Generation X (69%) and Baby Boomers (72%) shared this outlook, according to Transamerica. However, Generation Z workers (23%) were significantly more likely to say their employers were not age-friendly, while Millennials, Gen X and Baby Boomers reported this less (16%, 15% and 12%, respectively.)

The number of participants planning to remain in the workforce reflects the continued transition to defined contribution from defined benefit plans as traditional pensions decline in prevalence, Collinson explains.

“Shifting away from traditional employer-funded pensions to employee-funded defined contribution plans, which often have a contribution from the employer as well, that has shifted the onus to save toward the worker and to take on a lot of the risk management, and many, many workers are not fully equipped to do so,” says Collinson. “The retirement industry has undergone tremendous innovation over the last 25 to 30 years, as it relates to defined contribution plans.”

Workers Cite Health and Finances

The top financial reason workers cited for planning to remain employed past age 65 was wanting the income (54%), while the top healthy-aging reason was to remain active (51%), according to Transamerica. Additional healthy-aging reasons included to “keep my brain alert” (44%), “have a sense of purpose” (38%) and “enjoy what I do” (38%), the survey reported.

Certain financial concerns were cited frequently among the reasons given for continued working, including “concern that Social Security will be less than expected” (36%), “can’t afford to retire” (33%) and “need health benefits” at (27%), data shows.

Baby Boomers and Gen Xers were more likely to cite wanting the income (64%, 58%, respectively) and to say Social Security benefits will be less than expected (36%, 45%), according to the survey. Baby Boomers are also more likely to cite being active (57%) and keeping their brain alert (54%); whereas those in Gen X are more likely to say they cannot afford to retire because they have not saved enough (40%); and Gene Z and Millennials are more likely to cite personal development reasons (both 24%), according to the report.

“The other big, mega trend that’s happening is related to Social Security and [that] the trust funds are estimated to be depleted in about 10 years,” Collinson says. “It’s unclear how any reforms to address that might take place, and it could put an even greater squeeze on workers who are negatively affected by any such reforms.”

Transitioning to Retirement

Almost half of workers surveyed (47%) envision transitioning into retirement by reducing work hours to create more time to enjoy life (29%) or working in a different capacity that is less demanding and/or brings greater personal satisfaction (18%), Transamerica reported.

Nearly one-quarter of respondents (24%) reported they will immediately stop working either when they reach a specific age (14%) or when they have saved a specific amount of money (10%), and another 21% reported planning to work in a current or similar position until they cannot work anymore, Transamerica stated.

Comparing different generations, Baby Boomers and Gen X are more likely (27% and 23%, respectively) than Millennials and Gen Z (19% and 18%. Respectively) to envision working until they cannot work anymore, the survey found.

The report was released by the nonprofit Transamerica Center for Retirement Studies in collaboration with Transamerica Institute. The report included recommendations to retirement plan participants who plan to work longer to extend their working lives.

“As workers plan to extend their working lives, it is important they become more proactive about ensuring their continued employability such as protecting their health, keeping their job skills up to date, staying abreast of the employment market, and networking and meeting new people,” wrote the survey’s authors.

The analysis was prepared by the research team at Transamerica Institute and TCRS. The 25-minute online survey was conducted within the U.S. by the Harris Poll on behalf of Transamerica Institute between September 14 and October 23, 2023, among a nationally representative sample of 5,730 workers in a for-profit company employing one or more employees.

Investing July 8, 2024

Optimizing Plan Design in the Investment Menu

Experts discuss the trends of streamlining the investment menu and adding lifetime income options

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Art by Andrea D'Aquino
Optimizing Plan Design in the Investment Menu

While streamlining plan investment menus has become more of a trend among plan sponsors in recent years, in order to avoid overwhelming or confusing participants with too many options, David Blanchett—portfolio manager and head of retirement research at PGIM DC Solutions—says providing fewer options may not necessarily be the smartest strategy. 

“I think there is a desire to get more participants inside of professionally managed solutions, which is changing the role of the core menu,” Blanchett says. “I don’t think the core menu needs to get smaller; it just needs to be more intelligent.” 

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Blanchett emphasizes that it is more important to allow participants to create diversified portfolios that include things like long bonds, U.S. Treasury Inflation-Protected Securities, commodities and real estate. He says it is not necessary to have equity investment options like a large value fund, a large growth fund, large blend, mid-cap and mid-growth all on the same menu, for example. 

“When you don’t have a broad menu of funds that an adviser can use to build a portfolio, the knee-jerk reaction is going to be [to] roll over to an IRA that [the adviser will] manage,” Blanchett says. “I really wish that would be less of an impulse.” 

Providing Conservative Options 

From a compliance standpoint, according to ERISA Section 404(c), even though fiduciaries are shielded from employees’ poor investment choices, they are still responsible for providing a wide range of diversified investment options.  

Blanchett argues that a plan can “cover the bases” by offering 20 fund options, excluding TDFs, but it is important that plan sponsors consider how they are picking those funds. 

He also explains that while there are a “dearth of options” for people who want to build conservative portfolios, equity funds tend to dominate core menus, with defined contribution plans offering roughly three times as many equity funds as bond funds. Those core menus are mainly used by older participants likely to prefer a conservative approach, because the majority of plan participants are defaulted into target-date funds, Blanchett argues. 

David O’Meara, head of defined contribution investment strategy at Willis Towers Watson, says many plan sponsors are streamlining their core active funds and adding passive funds where they may have gaps in their investment menu. He says plan sponsors are also realizing that there is minimal uptake on anything beyond traditional equities and bond funds. 

“Participants tend to be unengaged, and they tend to rely on the default,” O’Meara says. “New [investment] options don’t get a whole lot of traction.”  

As a result, O’Meara says, plan sponsors are thinking of ways they can use this lack of engagement to the participants’ advantage by, for example, using the plan’s default option to either harness the value of investment diversity or incorporating a lifetime income solution within it.  

“The products that are coming out now, I view as either version 1.0 or 2.0, but there’s future versions of those solutions that will have better user experience interfaces and greater flexibility to meet the needs of a growing number of participants,” O’Meara says. “So lifetime income is definitely a place where we expect some significant innovation in the future.” 

Incorporating Lifetime Income in the Menu  

Blanchett says there has already been increased activity adding lifetime income options to investment menus, but plan sponsors remain hesitant, and the industry is “a ways away” from mass adoption. 

One innovation being used more often is a TDF with an annuity embedded—also called a hybrid annuity TDF. This investment vehicle’s goal is to default participants into a TDF, as in most defined contribution plans, then give participants the option to annuitize a portion of their assets at a certain age prior to retirement. One example of a hybrid annuity TDF is BlackRock’s recent launch of LifePath Paycheck. 

However, Blanchett argues this will not necessarily become a trend in investment menu design, as he believes many participants will not choose to annuitize 30% of their assets, for example, when given the opportunity. If a plan sponsor is offering a hybrid annuity TDF, but the annuity portion gets very little utilization, Blanchett argues that the sponsor is putting itself through unnecessary fiduciary risk. 

On the other hand, Kevin Crain, executive director of the Institutional Retirement Income Council, argues that because participants in hybrid annuity TDFs are only annuitizing a portion of their portfolios, not all of their assets, it could make them more comfortable with the solution.  

Crain says there is a need for more plan sponsors to work with consultants and professional investment advisers to understand and become more comfortable with hybrid annuity TDFs.  

“Annuities and hybrid target-date funds have a level of complexity which begs for plan sponsors [to] get professional help,” Crain says. 

But even before offering any sort of in-plan annuity, Blanchett says plan sponsors should consider other strategies like Social Security bridging.   

“The most disturbing statistic that I reference all the time from [PGIM’s] last plan sponsor survey [is that] only 13% of plan sponsors were aware of or acknowledge that they offer a Social Security optimization planning tool,” Blanchett says. “That should be 100%. Before a plan sponsor actively thinks about adding an annuity to a default investment, delaying Social Security payments is actually more advantageous.” 

Blanchett says plan sponsors should be actively giving participants guidance and information on Social Security optimization or bridging, rather than jumping to offering an in-plan annuity, which can be complex to implement and educate participants about.  

Plan sponsors should also consider the possibility that adding an annuity to the plan will have “residual effects,” because such options will be harder to remove in the future, Blanchett says. 

“If you add an investment to your plan, and then you don’t like the investment, there [are] no residual effects,” he says. “But if you add an annuity to your plan—a current committee might think an annuity is the best thing ever—once it’s there, it’s going to kind of always be there. If it’s in the default, it’s really sticky. … There’s residual effects of adding lifetime income solutions.” 

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