The Retirement Income Dilemma

The Retirement Income Problem

Demographics are driving the retirement income discussion. The statistics in Exhibit 1 help paint the picture of an aging workforce with doubts about their ability to retire comfortably.



The retirement income challenge offers an opportunity to align corporate objectives with employees’ retirement goals. To do this, we suggest sponsors design a Retirement Income Plan Road Map. The journey begins with an assessment of participant needs along with an understanding of the current state of the retirement income landscape. From there, a sponsor can begin to articulate their retirement income philosophy, which could lead to one of two potential types of plans.

The first plan type is an Accumulation Plan that focuses on accumulating balances throughout the working years—participants tend to exit the plan once they retire. The second type is a Destination Plan, one that actively works to retain retirees in the plan. If, for example, the philosophy points to a Destination Plan, the sponsor can take steps to establish the proper plan design, determine which options should be available in the investment menu and implement the supporting services needed to help participants retire and stay in the plan. With the Accumulation Plan, the sponsor offers supporting services to help retirees transition into retirement and, potentially, out of the plan. There is no right or wrong answer, but this approach can provide a useful framework for sponsors to address the retirement income challenge and navigate the often-confusing retirement income landscape.

State of the Retirement Income Landscape

As noted earlier, it’s important for sponsors to understand the retirement income landscape, including regulatory and legislative developments, the state of Social Security and the solutions currently available in the marketplace.

Over the past decade, there have been several regulatory and legislative developments pertaining to retirement income. In particular, the Setting Every Community Up for Retirement Enhancement Act of 2019  and the SECURE 2.0 Act of 2022 included a variety of provisions designed to make it easier for plan sponsors to implement retirement income provisions.

However, it’s not all good news. The Social Security Trust Fund is expected to be depleted by 2034 (per the Social Security Administration 2023 Annual Report) when it is estimated that tax income will be sufficient to pay only 80% of scheduled benefits. Social Security forms the foundation for most Americans’ retirement income and any shortfall could have wide ranging implications for how and when employees retire, potentially creating challenges to employers’ ability to effectively manage their workforce. At present, there are currently no meaningful legislative initiatives to address this critical issue.

Next, we highlight in Exhibit 3 the key features of the retirement income solutions that exist in the marketplace today and how they might fit into a retirement plan menu.



Some key takeaways from Exhibit 3 include:

1. There is a wide variety of options under the retirement income solutions umbrella.
2. There are tradeoffs when it comes to the features and benefits of these solutions. For example, solutions without guaranteed income components tend to be more liquid than those that offer some form of guarantee.
3. Given the complexity of the various solutions, it’s unlikely that adding just one solution will solve all the retirement income needs of any one plan’s participant base.
4. Appropriate retirement income solutions will depend on plan sponsors’ overall retirement income philosophy that aligns with the workforce and plan characteristics.

Lessons Learned (So Far)

The retirement income conversation has been ongoing for several years, and we believe there are four lessons learned.

First, retirement concerns are universal. Our global retirement survey asked participants across the United States, Canada, the United Kingdom, and Australia for their views on retirement. We show the results of several questions in Exhibit 4, and it is noteworthy how consistent the responses are across different markets.



The second lesson is that retirement income presents potential drawbacks, and that in-plan retirement income solutions may not be a fit for all plan sponsors.

The third lesson is there is no one-size-fits-all solution to the decumulation puzzle. Our global retirement survey asked, “Aside from Social Security and your personal retirement savings, what assets do you expect to use in retirement?” Exhibit 6 shows the wide array of income sources that participants identified and demonstrates that everyone’s puzzle pieces are different. Participants could potentially benefit from advice to help put these pieces together into a cohesive retirement income plan. 



That brings us to lesson four, which is that participants are looking for advice—in-person advice.



This point of access is important. We are not suggesting that plan sponsors directly provide advice. Rather, sponsors have an opportunity to position the plan as a resource from which participants can access advice, education and tools. That access can be affiliated with the plan’s recordkeeper, managed account service or through an independent firm. 

This brings us back to our roadmap to help plan sponsors navigate through this complex topic. It starts with a fundamental question: Do you want to sponsor an accumulation plan where participants accumulate assets and exit the plan upon retirement, or a destination plan where participants are encouraged to stay in the plan upon retirement?

There is no right or wrong answer, and different sponsors will come to different conclusions based on their circumstances. For those that do want to sponsor a destination plan, there are three key dimensions to consider:

1. The plan’s design, in particular its ability to allow for flexible distribution options in retirement
2. The investment menu, what investments are you offering to keep retirees in the plan and what level of guaranteed options make sense?
3. Supporting services, including tools and potentially access to advice

Too often we find that the retirement income conversation is almost wholly focused on investment products that can be added to a DC plan menu as the proverbial silver-bullet solution. While investments will undoubtedly be an important component of a plan’s approach to positioning itself as a destination plan, we believe decisions regarding the plan’s design and how it will support retired participants are just as important.

Jeri Savage is lead strategist for investment solutions at MFS Investment Management.

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.