Seeing Secure Income’s Benefits Feeds a Conviction

Updated.

What makes a good retirement plan?

Many retirees know the answer based on their lived experience following years of planning. For those of us not yet retired, developing conviction about what makes a difference in retirement is more a matter of research and, often, observation. As much as research reveals, observation can tell us a lot, too – and offer some valuable lessons.

My mother was an educator – first a music teacher and then an administrator, serving as the principal of an elementary school, a middle school and finally a high school.  Like many working mothers, she didn’t have much time for personal financial and retirement planning. But, as a participant in a retirement plan that provided straightforward ways to save and invest and, above all, a flow of guaranteed lifelong income, she was fortunate.

I’ve been able to observe, close up, the value that guaranteed retirement income delivers – giving my mother a sense of security and wellbeing that she would have been hard-pressed to achieve otherwise. Hers is just one example of many secure retirements that I have witnessed as a retirement planning professional. It feeds my conviction that guaranteed income should be a part of the retirement solution – the defined contribution plan – that many Americans now rely on.

In practical terms, this conviction means that a truly effective DC plan needs to provide an option that lets workers allocate a portion of their savings toward income generation early on.

DC Plans Falling Short on Income

While a little more than half of working Americans think they are on track with their savings to retire when they want, only 42% are highly confident they will have enough in retirement savings to fund a 20-year retirement, according to the 2021 TIAA Lifetime Income Survey. Six in 10 workers are highly interested in an annuity that provides lifetime income if offered through their employer’s retirement plan, says that same TIAA research. (Any guarantees are backed by the claims-paying ability of the issuing company.) Yet, more than one-third of employers think their plans fall short in securing guaranteed lifetime income – and 70% agree that their DC plan should include lifetime income options.

Progress is being made on this front. The SECURE Act’s passage in 2019 created a clear regulatory path for including guaranteed life income annuities within employer sponsored plans and new options are emerging that let plan sponsors easily do so. Yet, regulatory barriers hinder employers from offering these solutions as a default savings option – which would help ensure participation by even more individuals. This would ideally be a feature in all DC plans.

The Lifetime Income for Employees Act, introduced in Congress in 2022, would allow a retirement plan sponsor to use illiquid, and thus higher yielding, annuities as the plan’s qualified default investment alternative. It’s a worthy next step to continue expanding the use of annuities.

Effective DC plans also include:

Investment choices better tailored to workers’ life stages, circumstances and needs.

We have seen increasing customization in the investments available to plan participants. Today, target date funds are in wide use, serving to periodically rebalance asset class weights to more conservative profiles to minimize risk as employees move toward retirement age. In one recent DC marketplace survey, 96% of plan sponsor respondents indicated they offer the funds and 46% of total plan assets were invested in TDFs. Ninety-five percent of TDFs were used as the QDIA. However, according to the 2022 TIAA Retirement Insights Survey, a decreasing percentage of employers think that standard TDFs will meet their employees’ retirement saving and income needs. Instead, sponsors can use custom model portfolios that can be designed to meet even more closely a specific workforce’s objectives – and even include an income-generating component.

Practical information and education – in particular, on the income-generating potential of accumulated assets – so that workers can adjust strategies as necessary.

Educating workers about the retirement-income potential buried within their accumulated retirement savings also took a meaningful step forward with the SECURE Act. The act requires DC plan sponsors to present to participants a once-a year illustration of the retirement income they could generate based on their current plan savings balance, expressed as both a single-life annuity and a qualified-joint-and-survivor annuity income stream. The illustration can help remind savers that retirement saving’s most important goal is creating guaranteed, retirement-long income – and, ideally, spur even greater participant engagement in their retirement planning, saving and investing.

But plan sponsors can further leverage the illustration’s utility with some plain-spoken, supplementary details about the illustration’s purpose and what it actually reveals about potential income. The illustration also is an opportunity to remind participants about a plan’s educational offerings on optimizing employment-long savings for maximum lifetime income and how to project their likely income requirements. We hope too that a heightened focus on income will spur even more sponsors to consider closely the emerging new approaches for incorporating annuities in-plan.

My mother was able to have a dignified retirement and the peace of mind that she would never run out of money to pay for basic expenses. Everyone deserves that peace and degree of security when they retire. It is time for DC plans to innovate, embrace the future and deliver lifetime income to participants.

Kourtney Gibson is the Chief Institutional Client Officer at TIAA.  

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates.