Retirement Income: The Big Opportunity for DC Plans?

By Randy Myers

Reversing decades of growth, defined contribution retirement savings plans experienced net outflows of money between 2019 and 2021. Now, says Shawn O’Brien, associate director, retirement, at consulting and market research firm Cerulli Associates, many defined contribution plan fiduciaries, asset managers, and insurers are looking at ways to make DC plans more attractive retirement destinations through more robust in-plan decumulation features, services, and products.

Few plans offer such products right now, O’Brien told attendees at the 2023 SVIA Spring Seminar. Cerulli’s research indicates that only about 7% of consultant-intermediated plans have implemented or are in the process of implementing a “retirement tier” of products and solutions aimed at helping plan participants once they’re in retirement. That number is higher—12%—when looking only at plans advised by an institutional investment consultant rather than a retail consultant, but still leaves plenty of room for growth. Indeed, 23% of plans serviced by an institutional consultant—versus 9% of all consultant-serviced plans—are considering whether to implement a retirement tier. However, where plan sponsors are helping their plan sponsor clients create more retiree-friendly plans, O’Brien observed that it is usually happening in phases. For example, they may offer target date funds and systematic withdrawals from their plan, then move on to something like managed accounts or target-date funds with embedded annuities.

When consultants are asked what types of retirement income solutions they would be most likely to recommend to their plan sponsor clients, O’Brien said, they most often cite target-date funds with a guaranteed income component (68%), followed by target-date funds with an income vintage (50%), and managed accounts (36%). Only 9% anticipate they would recommend a stand-alone income annuity.

In thinking about retirement income solutions that plans might offer, O’Brien predicted that personalization will be a key attribute of next-generation qualified default investment alternatives. QDIAs offer legal safeguards to plan sponsors who offer them as default investment options within their plans. O’Brien noted that PIMCO and American Funds have already introduced personalized target-date funds that can be tailored to an individual’s unique risk and return objectives, and that a number of fintechs promising similar capabilities have been gaining traction on recordkeeping platforms. Elsewhere, Cerulli’s data shows some plans working with retirement aggregator firms offer a “dynamic” retirement solution that can, for example, slot plan participants into a target-date fund early in their career and then into a managed account as they approach and transition into retirement.

O’Brien pointed to a number of reasons why the defined contribution retirement plan market has been slow to adopt retirement income solutions to date, including the highly litigious nature of the marketplace, the need to incentive recordkeepers to integrate retirement income solutions into their platforms, and the need to educate plan sponsors on how creating a retiree-friendly plan can benefit their plan, their plan participants and their organization.

O’Brien thinks plan sponsors could buy into the idea of creating their defined contribution plan as a benefit more akin to a defined benefit pension plan by helping participants convert savings into retirement income. Doing that, he suggested, should allow plans to retain a larger pool of assets by making retirees less likely to exit them when they stop working. The larger a plan’s pool of assets, of course, the more clout it has when negotiating costs with plan providers and asset managers, which could provide meaningful financial benefits to plan participants.

Still, O’Brien said the financial incentive to plan sponsors may not be evident—at least not immediately. But, he said, creating a plan that can effectively take less affluent retirees both to and through retirement could help with attracting and retaining talent with the right communication strategy and framing. That could certainly be an incentive for plan sponsors in today’s tight labor market.