Plan Sponsors Seek Liquid, Portable Retirement Income Solutions

When looking to offer participants a paycheck-like retirement income experience, defined contribution plan sponsors are most interested in liquid and portable solutions, according to data published by T. Rowe Price in March. 

More than half of plan sponsors (59%) cited “recognition of the need to help participants convert DC plan balances to retirement income” as the most influential factor driving their interest in exploring or offering retirement income solutions, T. Rowe Price’s “Implementing an In-Plan Retirement Income Solution” report showed. 

But when plan sponsors and consultants were asked to identify which retirement income products and features have the greatest appeal, T. Rowe Price’s survey results yielded little differentiation of potential solutions. 

Among the surveyed plan sponsors, simple systematic withdrawal capability was rated as the most appealing solution, followed closely by target-date investments with a managed payout feature and investment solutions to help maximize Social Security benefits. Consultants and advisers also rated these options as the most appealing. 

Having an annuity portal (access to out-of-plan annuities) and bond ladder-based investment options were rated the lowest by plan sponsors. 

Notably, T. Rowe Price found that non-guaranteed income solutions gained the most support from plan sponsors, consultants and advisers. Jessica Sclafani, T. Rowe Price’s senior defined contribution strategist and the author of the report summarizing the study, said in an emailed response that she believes this reflects where many plan sponsors are today in their retirement income journey: primarily focused on supporting retired participants in recreating the paycheck experience they had while employed.  

“While the immediate focus appears to be on creating an income stream for retired participants, we still believe guaranteed solutions can have a place in building a thoughtful and comprehensive in-plan retirement income program,” Sclafani says. 

Compared to other retirement income options, plan sponsors also showed a lack of conviction for an in-plan annuity, in-plan deferred income annuity or a qualified longevity annuity contract, according to survey results.  

This trend is in line with T. Rowe Price’s finding that plan sponsors are most interested in liquid income options, as annuities require participants to lock up a large portion of their money in a contract, unless one is willing to pay a penalty for liquidity.  

As plan participants are increasingly keeping their assets in plan through retirement, the report argues that this emphasizes the need for DC plan sponsors to consider how their participants can best withdraw these savings throughout retirement. 

The survey found that around DC plan participants aged 65 and older who left their jobs one year prior still had around 50% of their assets left in their plan in 2021. Overall, the average percentage of DC account value staying in– plan for three years after retirement has been trending upward over the past several years, according to T. Rowe Price.  

A Managed Payout 

T. Rowe Price offers a managed payout solution that is designed to provide a monthly payment based on a 5% annual withdrawal target, which is adjusted for investment performance over time.

The managed payout, which was implemented in 2019, is an additional vintage of the plan’s target-date suite and is only available to fully vested, terminated or retired participants who have reached the age of 59.5 or older to avoid penalties. This is a payout solution that retired participants could opt into. 

“We did this to increase the predictability of the year-over-year monthly ‘paycheck’ in retirement and reduce the impact of market volatility on distributions, which—considering the volatile market environment that participants experienced in 2022—is increasingly appealing,” the report stated. 

The managed payout was also designed to be flexible so that participants can withdraw funds from the target– date vintage with the managed payout feature at any time. The amount of the monthly payments will automatically adjust based on changes in the number of units owned by the participants, according to T. Rowe Price.  

While a conventional drawdown rate is 4%, T. Rowe Price chose the 5% rate because those in early retirement tend to underspend, often in fear that they will run out of money. The higher rate is meant to encourage them to “enjoy their golden years fully,” as opposed to later, when they may not be physically able to check things off their retirement bucket list. The 5% rate is also based off of the average monthly net asset value of the target-date trust over the previous five years. 

According to T. Rowe Price, the managed payout solution is something plan sponsors can opt to “turn on,” as opposed to a separate investment outside of the current suite of retirement date investments that would require more extensive monitoring.  

Currently, more than 30 plan sponsors have added T. Rowe Price’s managed payout investment options, most of whom decided to do so in 2022. This capability was only first introduced to the DC marketplace in 2019. 

T. Rowe Price terms managed payouts a “doable first step” for plan sponsors but advises them to “take a stab at defining what success looks like for their committee prior to implementation.”

Sclafani added that solving for in-plan retirement income is an “iterative process” that requires a variety of solutions. 

“We are encouraging plan sponsors to consider building a retirement income ecosystem that includes a plan design able to facilitate retirement income ‘paychecks,’ a broad array of investments—which may include personalized and/or insured solutions, as well as access to advice,” Sclafani said.  

This data is based off of the T. Rowe Price Retirement Income Plan Sponsor Survey, which was conducted in November 2020 and included responses from 211 DC plan sponsors. In addition, the second annual T. Rowe Price Defined Contribution Consultant and Advisor Study was conducted at the end of 2021, with responses from 32 firms with more than 33,000 plan sponsor clients.