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Retirement

What plan sponsors need to know about lifetime income

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next issue no. 11: Investment corner

The conversation around guaranteed lifetime income has been steadily growing since the SECURE Act of 2019 changed safe harbor provisions to protect in-plan annuities. Participants have long wanted lifetime income built within their retirement plans, to mirror the benefits of now essentially extinct defined benefit plans.

When Nuveen conducted our third annual Equilibrium survey we spoke to 189 institutional investors who were actively involved in their DC plans, across the U.S., Canada and the U.K.

When asked about the overarching objective of a retirement plan, the respondents prioritized the traditional role of a DC plan, namely providing a savings vehicle for plan participants. However, the most selected answer across rankings was the broadest and most aspirational; to support the financial well-being of employees.

Figure 1: DC plan priorities

Why guaranteed lifetime income

Research shows though that for plan participants, a guaranteed lifetime income in retirement is a significantly larger concern and could be used to motivate recruitment, retention and allow employees to retire on time. Seventy percent of participants surveyed by TIAA expressed a preference for a company that offers a guaranteed lifetime income solution in retirement. Even higher numbers expressed a preference for income stability over just principal protection, with 78% of respondents to an EBRI survey asking for income. These numbers are not necessarily indicative of a disconnect between participants and plan sponsors, but they could be a growing sign that participants want the next evolution in their retirement plan.

They are not simply looking for a tax-advantaged savings vehicle that opens up at retirement. Participants understand that guaranteed income has a significant role in securing their retirement and they are, rightly, looking to their employer to help them in that process.

When asked about their views specifically on guaranteed income, a majority of plan sponsors see that a guaranteed income solution can improve the risk/return profile for participants, and they see a growing need to explore the available options for lifetime income given the current market environment.

The other telling portion of the dataset is just how large the ‘neutral’ portion of respondents is. The education around the role and benefits of a lifetime income solution within a retirement plan is still at a relatively nascent stage. Those who have an opinion on the matter are largely in favor, with only around 10% of respondents disagreeing with the potential role and benefits of lifetime income solutions. It is the role of asset managers as well as advisors and consultants to help educate plan committees on the role that guaranteed lifetime income solutions can provide. The solution isn’t right for every plan sponsor, but it appears that on balance, once a sponsor has a firm opinion of lifetime income, they view it positively.

49% of Americans say running out of money is their biggest retirement concern3

Participants say . . .
Figure 2: Views on income solutions in DC plans

Myth vs. Reality

The how of guaranteed lifetime income

When it comes to lifetime income solutions there are both guaranteed and non-guaranteed products. Systemic withdrawals are the most common withdrawal method employed in the current 401(k) environment, where the participant determines the amount and frequency of withdrawals from their retirement account, until the point the funds are depleted. This option contains few protections for the participant, but it is the most flexible and most liquid of the various payout options. There are also managed payout options, in which a managed account investment manager works to determine regularly scheduled payouts from the participant’s assets, with the goal of ensuring that the assets last through retirement. However, there are no guarantees with this type of solution.

We think that an in-plan annuity is the best way to integrate a lifetime income solution into a retirement menu. This can be wrapped into a target date-like structure, where an allocation to an annuity is built into the overall glidepath of the retirement plan, culminating in an allocation around 40% to an annuity product at the time of retirement, although this percentage can certainly be higher or lower depending on specifics. It could also be structured as part of a range of QDIA-eligible structures.

The benefit of in-plan gives the option, but not obligation, to convert those assets into a lifetime income stream at the point of retirement. Simple is key though; annuities can be very complex, and we find it easiest for these solutions to be adopted by participants by embedding them into something that the participants are already familiar with — such as a target date or managed account offering.

In-plan annuities wrapped into a fund structure offers the most seamless integration for plan participants as little will change from the perspective of the plan participant. The genesis of target date funds was to allocate risk according to age and time to retirement, and this metric, while simple, still reflects the needs of a significant portion of plan participants. Wrapping the annuity allocation into a structure that is broadly familiar to participants, whether target date or another type of structure such as a managed account, eases the transition from viewing a 401(k) balance as a savings vehicle to a lifetime income vehicle with a set decumulation plan. Making this transition as seamless as possible for the plan participant is the best way to encourage uptake of the annuity at the point of retirement and get participants the lifetime income they need.

Figure 3: Lifetime income solutions offer varied benefits

Education for participants remains a significant area for plan sponsors. Recent TIAA data shows that upward of 80% of new employees use the default option in their retirement plan, while longer-tenured employees tend to more actively manage their investments. Both types of investors need to be educated as to the value of an annuity option within their retirement plan menu, either so they understand what the default option is and why the plan designers selected it, or so they understand that leaving the assets within that option is the better choice, rather than actively managing it away.

There are also some technical considerations of different types of annuities, as they can be relatively complicated products with different contract types. Without getting too into the details, as different annuity types will suit different plans and participants, the principal types are:

There are also variables in the underlying contract within each of these types of annuity, such as minimum payment lengths, survivor benefits, variable or indexed annuities. Each change to the underlying annuity affects the premiums and payouts accordingly, and each type of solution needs to be carefully evaluated for its suitability. These are complicated insurance products that need to be understood before they can be implemented.

It also takes time to examine a plan menu and endeavor to evolve the options to include a guaranteed lifetime income solution.

Figure 4: Planned changes

Our survey data shows that for those plans that are considering making changes to their lineups in the next two years, 54% are looking to add some form of lifetime income solution. This is significantly higher than any of the other options presented and highlights that plan sponsors are closely looking at retirement income as one of their highest priorities in the current environment.

They are not simply looking for a tax-advantaged savings vehicle that opens up at retirement. Participants understand that guaranteed income has a significant role in securing their retirement."

We believe that a guaranteed lifetime income solution is something that plan sponsors should be carefully considering. The evaluation of different options and whether they are the right solution for participants to meet their needs in retirement rests on detailed and careful education and analysis. The cost of the solution is a major consideration, as is the underlying complexity. Not all solutions are easy to explain, and many have different characteristics that can change vital components of the annuity. The portability of the solution is also a significant consideration, as employees are increasingly more likely to change jobs, while the overall support afforded by the solutions provider to participants should be robust to educate and support them in their retirement journey.

In this issue
Retirement Having the lifetime income conversation with participants
Integrating the needs of plan participants into any major change to a retirement plan is paramount to ensuring consistent and lasting engagement.
Retirement How we got here: A history of retirement in the United States
We look back through the history of the retirement industry in the U.S., looking at how we got to where we are today, and why we think Nuveen and TIAA are well placed to lead the industry into the future.
Retirement Q&A with Nuveen CEO Jose Minaya
In a Q&A with our CEO, Jose Minaya, we look at why retirement is a topic that matters to him personally, and to our firm as a whole.

Endnotes

1 TIAA 2021 Lifetime Income Survey, May 2021.

2 EBRI Retirement Confidence Study, 2020.

3 AARP, May 2019.

Any guarantees are backed by the claims-paying ability of the issuing company.

Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association of America (TIAA).

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.

This information does not constitute investment research as defined under MiFID.

Please note that this information should not replace a client’s consultation with a tax professional regarding their tax situation. Nuveen is not a tax advisor. Clients should consult their professional advisors before making any tax or investment decisions.

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