Data and Research March 20, 2023

Retirement Income Products Should Reflect Retirees’ Desire for Stability, Survey Shows

Retirees expressed that guaranteed lifetime income, as well as control and access to their money, are top priorities in a DCIIA research study.

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When thinking about their financial security in retirement, retirees value control, safety and predictability the most, according to research published by DCIIA’s Retirement Research Center.  

Plan sponsors who are looking to provide a full menu of retirement income options to their participants need to consider the common concerns of retirees, as well as the new product landscape, a panel of experts explained at a PLANSPONSOR Plan Progress webinar last week.  

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DCIIA’s Retirement Research Center surveyed 2,009 retirees between the ages of 50 and 75 and segmented the respondents into four categories based on their overall feelings about their retirement: optimistic/thrifty (25%), confident (26%), nervous (25%) and struggling (23%). 

Same Priorities Across the Board  

Despite the retirees’ varying confidence about their financial security, they all ranked receiving a steady income, the safety of their finances and guaranteed lifetime income as their top three priorities—ahead of investment return—when thinking about their finances in retirement.  

Pam Hess, executive director at the DCIIA Retirement Research Center, told webinar attendees that respondents’ answers were “remarkably similar” across the four groups, implying more consistency than one might expect. 

Capturing high investment returns ranked the lowest in importance among the respondents. Warren Cormier, the director emeritus of the DCIIA Retirement Research Center, said that is likely because people are worried about risky investments, and many retirees know they would not be able to recover from any significant investment loss. 

Overall, Cormier said the findings are “good news” for plan sponsors, because they can pick investment products for their retirees without needing to consider into which confidence segment they fall. 

What’s Up With Annuities? 

According to Bonnie Treichel, the chief solutions officer at Endeavor Retirement, there is a new product landscape of technology and innovation that did not exist a decade ago, and there are several new products entering the market that give plan sponsors the option to assess the needs of the plan and its participants.  

In-plan annuities, target-date funds with annuity options and target payout funds are examples of in-plan retirement income products that have been launched since 2020.  

However, annuities have developed a bad reputation among participants, and Treichel said adviseors introducing these options should be cautious about the language they use. 

“For example, calling this ‘decumulation’ is confusing,” Treichel said in an emailed statement. “This is about the paycheck an individual receives starting the first day of retirement and helping them understand what that paycheck will look like.” 

Treichel said people are particularly afraid of retail annuities in which an insurer sells a retiree an annuity with an 8% trail, with no oversight on the person selling the annuity.  

But there is a key distinction that should be made with these new solutions, Treichel explained.  

“For the most part, [annuities] are being incorporated as a part of the retirement plan subject to ERISA (or similar state law) where a plan sponsor is making a decision in the best interest of participants,” Treichel said. “That means that participants have the protection of someone else thoroughly vetting the annuity option on his/her behalf, unlike annuities sold in the retail market.” 

Whether a plan sponsor offers a plan-based annuity, a managed payout or a hybrid of the two, Treichel said each option has trade-offs the plan sponsor has to evaluate before making a prudent decision. 

Plan-based annuities are typically more expensive than managed payout because the plan sponsor is paying for the guaranteed income. But based on DCIIA’s research, guarantee and comfort may be what people are seeking the most, Treichel noted. 

Kevin Hanney, the founder and president of CapitalArts Global LLC, says participants may be wary of fixed annuities, as they are funded with a one-time lump sum and are subject to withdrawal penalties if taken out early. While fixed annuities tend to offer the highest level of guaranteed income for the rest of the annuitant’s life, Hanney says they tend to be “one-dimensional.”  

“When it comes to the practical aspects of delivering a retirement income solution through an employer-sponsored plan, you tend to need more options,” Hanney says.  

Many retirement income products come down to a trade-off between certainty and flexibility, Hanney says, adding that it is important for plan sponsors to try to give adaptable solutions.  

Show Me My Money 

While not ranked as highly as receiving a steady income in retirement, many respondents to DCIIA’s survey placed significant value on having control of and access to their money, as well as reversibility—in other words, not being completely locked into a product.  

“People always want an escape hatch,” Cormier said during the webinar.  

The SECURE 2.0 Act of 2022 has helped pave the way for new retirement income solutions and has created more flexibility, such as allowing annuities to increase at a constant percentage of no more than 5% each year and raising the $200,000 cap on how much money a participant can use from a retirement account to purchase a Qualified Longevity Annuity Contract. 

As annuities have mutated into several different forms, such as deferred annuities and variable or index annuities, Cormier predicts that there will be an integration of different products in the future and that plan sponsors may start offering a menu of retirement income options for participants. 

In order for more participants to take up these different retirement income options, Treichel said advisers and plan sponsors need to become educated; then they will need to continue to educate participants. 

“There is a lot of perception around retail annuities, and this is a different market, so it will take education to keep everyone informed of the new offerings available to support participants,” Treichel said. 

Benefits March 20, 2023

Re-Examining the Default Retirement Age

One of the most important retirement tools requires relevant data, such as anticipated retirement age, to be updated over time.

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As the retirement industry has undergone a digital transformation, the online tools available to plan participants have become even more valuable. An August study by Cerulli Associates found that 86% of plan participants find savings tools and calculators on their 401(k) website very or somewhat helpful for retirement planning, up from 77% in 2020.

But like all types of data analytics, the usefulness of tools like retirement calculators depends heavily on the accuracy of the data that they use to make their projections. To take a best guess at the future, they need to make several assumptions about factors such as rates of return, inflation and the age at which the participant will retire.

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That last item—retirement age—often starts with an assumption that the participant will exit the workforce at age 65, likely a vestige of decades past when that was the full retirement age for claiming Social Security benefits.

“Age 65 is a general rule of thumb that came about in 1935 [when Social Security launched] and anchors back to the retirement of previous generations,” says Jack Barry, vice president of product development, strategy and transformation at John Hancock.

Of course, fewer than 2% of the U.S, population now has a “normal retirement age” of 65, and more than 80% have a normal retirement age of 67. When it comes to retirement calculators, however, many recordkeeper retirement calculators still focus on 65 as the default retirement age.

A moving target

Americans are starting to change the way that they think about when they will retire, based on economic conditions and their own desires. In February, 30% of Americans told Nerdwallet their planned retirement age had changed in the past year, with 16% planning to retire later and 11% hoping to quit work sooner.

But the age at which people retire, of course, does not have to correspond to the date at which they start taking Social Security.

“We strongly recommend that at least the primary earner in the household delay taking Social Security until age 70,” says Wei Hu, vice president of financial research at Edelman Financial Engines, where retirement calculators use 65 as the default retirement age assumption. “There are very strong delayed retirement credits that make that the best way to maximize the household’s value of lifetime benefits from Social Security.”

Wei says that EFE uses 65 as the default in its calculators because it falls in the middle of the range of ages that most people might seriously think about retirement. For younger workers, that number may be more of a general idea, while older workers may have a more specific notion of when they will retire, and the calculators need to be able to serve both.

Jason Jagatic, head of workplace thought leadership at Fidelity, which uses a default age of 67, agrees that one of the goals of retirement plan calculators should be to lower the barrier to entry for users just starting to think about their plan.

“Oftentimes, people don’t know where to get started, or they’re intimidated by the process of getting started,” he says. “Using assumptions is just a way to streamline that: It’s a starting point to give them an informed position that they can then go and edit.”

The importance of education

As people get older and advance in their careers, it becomes more important for them to adjust their data to produce more accurate projections.

“If you anchor to the wrong number for too long, you don’t necessarily have a full view of what your retirement is going to look like, and by the time that comes to reality, it might be too late to make the adjustments that you need,” Barry says. “If participants are just taking the rule of thumb, versus taking something that’s personalized to them, they might miss out on opportunities.”

No matter on what default retirement age a calculator starts, plan sponsors and their advisers need to connect with participants to help them understand that the input is just an assumption and that they should change it, as necessary, to better reflect their personal circumstances.

“It can cause emotional distress in some people when they have to meet a certain deadline, such as retiring at 65,” says Emilio Vela, director of participant engagement at Pensionmark. “Retirement calculators are supposed to be more of a reference guide for participants, versus it being the only component they use to really map out their retirement.”

Improving engagement

In addition to making sure that participants understand the assumptions used, retirement plan calculators offer other ways for plan sponsors and their advisers to engage with participants about how it uses data to create projections.

“The plan sponsors have an opportunity to explain [to participants] what these things in the calculator actually mean,” Vela says. “So they become empowered to go through that process on their own and feel comfortable that they really understand what it is producing or generating.”

Beyond their assumptions, retirement plan calculators may offer different results to participants depending on the formula used. For example, one calculator might assume the participant converts a nest egg into an annuity, while another might use a drawdown strategy.

Aside from the assumptions, retirement plan calculators have improved at factoring in more employer-provided data, such as age or income. Retirement calculators also increasingly take a more holistic approach, allowing participants to input things like debt, spouse’s income or out-of-plan income sources.

“If you can pull in clients’ actual information on things like account balances or savings data, that goes a long way, because it gives you the most up-to-date and accurate data,” Jagatic says. “That’s one way that a plan sponsor can really help participants make the most of these tools.”

‘As realistic as possible’

Many best-in-class recordkeepers pair their calculators with education—either online or in-person—that allows plan participants to gain a better understanding of their overall retirement security.

“Any time you’re doing financial planning or retirement planning, you want it to be as realistic as possible,” says Matthew Compton, managing director of retirement solutions at New York-based Brio Benefit Consulting.

From there, plan sponsors can offer additional communications to nudge participants to make changes, such as increasing their contributions or postponing their planned retirement date, that can improve their odds of a successful retirement. Participants can make changes to the assumptions in a calculator to see an estimate of the impact such changes could have on their nest eggs.

“Oftentimes, it’s about getting people engaged and planning, and that accessibility comes from multiple different levels with a retirement calculator,” Jagatic says. “People can use it on the go, but the language and terminology is still accessible. Making it simple and providing education is key.”

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