Retirement Tier Widely Recommended for DC Plans

As more Americans shift from saving to spending in retirement, the majority of consultants of large 401(k) plans say plan sponsors should add a retirement tier and retiree-focused investment options to retain retirees and to help them manage their assets in retirement.

PIMCO surveyed 27 consultants and advisory firms representing 3,500 clients with more than $4 trillion in plan assets for its 14th Annual Defined Contribution Consulting Study. Sixty-six percent of respondents report that plan sponsors prefer to keep 401(k) participants in-plan post-retirement—an increase of 20 percentage points from five years ago. Two-thirds of the consultants surveyed say they support the adoption of a retirement tier in defined contribution (DC) plans.

“The focus of plan fiduciaries has shifted dramatically toward serving the needs of retirees in-plan, as individuals, more than ever, look to their 401(k) account to support spending in retirement,” says Rick Fulford, head of PIMCO U.S. Defined Contribution. “Adding a retirement tier—retiree-focused investment options and related support focused on meeting the unique monthly income, liquidity and capital preservation needs of retirees—would help those who no longer receive a paycheck better manage their retirement.”

The majority of consultants agree on the top three actions for retiree retention: adding distribution flexibility, including retiree-focused investment options and providing employee education/communications. The top recommended retirement income investment strategies include target-date funds (TDFs), income focused fixed income and multi-asset payout strategies.

The Defined Contribution Institutional Investment Association (DCIIA) notes that keeping participants in their DC plans post-retirement allows them to benefit from the lower fees and additional governance offered by their plans relative to some retail retirement savings options. It suggests that DC plan sponsors may already have options in their plans that can be used for a retirement tier, and plan sponsors can do a gap analysis to see what else is needed.

A “retirement tier,” according to the DCIIA, is a range of products, solutions, tools and services, all designed in coordination to allow 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. This not only includes investment options that fit a retiree’s goals, but advice offerings and different withdrawal strategies.

Other Investment Considerations

Respondents to the PIMCO study had other thoughts about DC retirement plan investments and investment menus. Consultants surveyed recommend nine core menu options: five equity, two fixed income, one capital preservation and one inflation-protection. Within fixed income, core/core+ and multisector bond remain top recommendations. Within equities, U.S. and non-U.S. developed remain top choices, while emerging markets equity is now supported by two-thirds of consultants.

Also, advocacy for active management remains strong in key market segments including U.S. and non-U.S. fixed income and emerging markets equity. Consultants agree that custom allocation services provide superior portfolios. White label assets comprise 20% of total large market assets under advisement, while custom target-date assets remain modest.

Support for environmental, social and governance (ESG) investments was up significantly, recommended by nearly half of consultants.