Product and platform: a focus on lifetime income

next issue no. 12: Consultant Corner

No doubt about it, plan sponsors have full plates. Whether it’s implementing regulations such as SECURE and SECURE 2.0, navigating a changing — and increasingly hybrid and remote — workforce, or ensuring that employees are diverse and financially literate, the to-do list is long.

"Employees have numerous and increasing challenges in their lives, and they are looking to employers to help holistically manage what life throws their way,” said David O’Meara, Head of Defined Contribution Investment Strategy at WTW. “We have to work with our clients to examine how DC (defined contribution) fits into that puzzle and address a myriad of employee needs.”

“Many DC plan sponsors are in learning, evolutionary mode,” says Kelly Henson, Defined Contribution Investment Strategy Leader at Mercer. This is especially true on the investment and plan design side, as new products come out and investment needs change.

“More plan sponsors are looking to build out robust and holistic plans as they relate to financial wellness more broadly, retirement income, and integrating more personalized advice,” she says. “They see that there are additional features and vendor partnerships that they need to support their employees.”

Evolving plan design

Bear in mind that DC plans weren’t always supposed to have such a broad mandate. Originally, they were designed as a supplemental savings vehicle to enhance defined benefit (DB) plans, and to complement Social Security income after DB plans went away. 

Over nearly five decades, however, DC plans have evolved into the primary savings vehicle for most Americans, and plan design must keep pace. O’Meara sees two differing approaches to solving this puzzle, noting that a relevant question has become: “How do we integrate financial resilience into the plan and communicate that out? And should we add that program inside the plan, or outside the DC plan?”

In other words, does the onus fall back on the plan sponsor and, if not them, who is the arbiter of financial resiliency?

“We have to acknowledge that the DC component of retirement savings is important, but is it the overarching vehicle in which resiliency lives, or is financial resiliency the broader issue, and the DC component sits inside that? We are seeing solutions coming from both of those angles.” 

To O’Meara, much of the challenge is being driven by litigation and tax policy and the desire to protect the plan sponsor while also keeping at the forefront the participant perspective.

Bill Ryan, Head of Defined Contribution Solutions at NEPC, also identifies litigation as a significant and growing concern. In his view, there is a need to press investment managers on lineups and fees.

“The number of lawsuits goes up year-over-year,” he says. “Investments and fees are the lowest common denominator for these lawsuits, so the purpose and rationale of each investment and the associated fees has to be a specific focus for plan sponsors.”

This is especially true as more asset managers seek to implant their product innovation as the default setting in plan sponsor menus.

Bringing lifetime income into plans

The emergence of in-plan, guaranteed lifetime income solutions continues to be a focus for plan sponsors. Since no two solutions are the same, consultants can have a significant role in the transition toward TDF-like defaults that glide investors into products that guarantee lifetime income.

"This is an area of rapid change that bleeds over into product developments around managed accounts and TDFs," Henson says. For example, she says, different product providers can use different terminology to talk about similar expected outcomes.

“Most TDFs are built to provide some wealth in retirement. How do we educate our clients on what lifetime income is and isn’t? We have to acknowledge that 86% have some sort of income,”¹ Ryan says, citing recent research from NEPC.

When it comes to the default investments within a retirement plan, O’Meara sees the need to acknowledge that TDFs unquestionably do work for a lot of individuals early on in their investment journeys, but he sees a need to differentiate participants who are nearing retirement.

“As assets flow into the default, namely TDFs, there is a growing recognition that they work really well for individuals who can be grouped together, i.e., those who need to simply participate, save, and grow assets with a reasonable asset allocation,” O’Meara says. “The critical area where TDFs fail is to meet the needs of those near and in retirement.”

He goes on to say that, while product development has been prolific, its deployment has been uneven — making it hard for plan sponsors to readily understand which tools are at their disposal.

David builds on this by breaking down the developments into three areas: platform, product, and the process of bringing those two together. “On the platform side, we have to look at what is available, and what can be made available to plan sponsors. Record keepers are adding new products all the time, but the rollout isn’t necessarily “ even. We need to find out what is on platform, and what is still being developed,” he says. “On the product side, we have to ask how new products meet participant needs, be that liquidity, growth, cost, income, etc. These may be the basics, but we have to nail it.” And when it comes to integrating the two, “a successful income solution needs to bridge that gap. It has to be an integrated experience that lowers the barriers for entry as far as possible.”

Keeping an eye on the participant

Focus should always be on the participant and making sure that saving for retirement remains simple. "We have to communicate these changes in a way that is simple for the participant to understand, decide and implement," Henson says. "However, it does not need to be the same for the plan sponsor and vendors. These are complicated products and solutions, especially around decumulation."

For Ryan and NEPC, pragmatism is the name of the game when it comes to considering participant needs.

“If a participant needs 80% income replacement, and our calculations show that Social Security would get them 30-40%, then we can look for ways to close that remaining gap, be it annuities, an available pension, or distributions of funds from their retirement savings. We solve for that problem. You can loosely group participants into one of three categories; overfunded, funded just enough, or underfunded. And each can initially have a grouped approach with a set of initial products for consideration. Then more complex and custom solutions come in.”

There will remain differences between asset managers and record keepers when it comes to threading the needle on adding products and making clear why those products can be beneficial for participants.

 “No one has it exactly right,” Henson says. “Finding that balance between personal, easy, hi-tech, custom, etc., isn’t easy.”

From tactics to strategy

In an industry that continues to be fast-moving, albeit at a time with at least relative regulatory stability, future priorities and plans remain focused on clients and retirement income. Ryan has a simple target for 2024 and beyond, saying, "As always, we will just try to get better. We will have as many conversations with clients as we can, and we will help define what retirement income means. We are also focused on bringing down managed account fees, so there is a much more competitive environment between target dates and managed accounts."

Product remains a focus for Henson as well, as she sees the work of evaluating new developments as ongoing. “We are working hard to build out teams to do more in-depth reviews, to support clients in that evaluation, to help clients understand their objectives and build tools to help participants. It all builds toward enhancing those retirement goals.”

Having the freedom to find a long-term focus is important for O’Meara: “We are now in a place where sponsors can push past tactical needs and focus on long-term strategy. Sponsors can ask what they should be delegating, how we can facilitate getting to the right solution, how they can keep moving forward to meet the needs of their participants. We’re never standing still.”