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Taking off for retirement income

We see three major gaps in the U.S. retirement system today threatening American’s retirement plans:
  1. Coverage gap: Many Americans do not have access to a retirement plan.
  2. Savings gap: Americans need to do a better job of saving for retirement.
  3. Income gap: Americans lack knowledge about properly managing withdrawals from their retirement savings, so they don’t outlive their assets.

Given how retirement plan design has evolved over past few decades, these gaps shouldn’t come as a surprise. Originally, defined benefit plans, even 403(b) plans, were designed to provide retired employees with a guaranteed stream of income. In contrast, 401(k) plans were designed to provide supplemental savings on top of other retirement income plans. But over the years, 401(k) plans gradually began to replace defined benefit plans as the retirement plan of choice for plan sponsors.

Now, with the combination of financial difficulties facing the social security system and increasing longevity rates, the 401(k) plan has taken on an even more critical role in the U.S. retirement system. While the 401(k) plan may have been undeservedly promoted to such an important role, both the retirement industry and legislators have been focused on helping improve coverage and savings gaps in the U.S. retirement saving system in recent years. For example, the increased use of auto-enrollment and auto-escalation features within 401(k) plans has helped address some of the coverage and savings gap. But the third retirement gap related to income has not seen as much attention. That needs to change.

Types of in-plan guaranteed income solutions

Yet the answer is not as simple as adding income product(s) to the plan menu. That would be teaching employees to dive without first giving swimming lessons. There isn’t a one-size-fits-all target date fund-like solution to solve for retirement income. Given that employees’ risk/return profiles become much more personalized as they age, investment solutions must provide greater flexibility to meet retirees’ varying income needs. Communication is also an enormous part of the equation, especially for pre-retirees. The defined contribution industry needs to recognize that the engagement model must change so employees can make a successful transition to retirement.

The majority (70%) of employees say guaranteed retirement income is the most important thing their retirement plan should provide, yet only 32% actually have an option for monthly retirement income in their plan (less when excluding 403(b) employees).1

Not your average participant

Many 401(k) plan designs are based on assumptions for the “average” participant, with a standard risk/return profile, presumed retirement age, average salary and lack of engagement around the retirement-planning process. However, as participants near retirement some of these assumptions shift.  Not only do near-retirees have increasingly personalized risk/return profiles and income needs, engagement behavior changes. They begin to seek out education and guidance on how to transition into retirement, and increasingly view their account balances and activity. With all this in mind, there are several fundamental changes plan sponsors can make to increase the focus on generating retirement income within their plans:

True or False: 

Focusing on retirement income solutions within 401(k) plans requires plan sponsors to agree to keep participants in the plan post retirement.

False. The decision to retain or remove retired or terminated employees from the plan varies from plan to plan, and steps can still be taken toward optimizing retirement income. Still, nearly 50% of plan participants expect their 401(k) to be their primary source of retirement income, regardless of whether it’s left within the plan or rolled into an IRA.2

1) Designing a communications strategy that shifts the emphasis of the 401(k) away from just saving and accumulating wealth, to one that focuses on retirement income as the ultimate goal. Actions may include:
  • Tailoring messaging toward specific employee demographics, especially pre-retirees.
  • Providing employees with retirement income illustrations in enrollment materials, web interfaces and quarterly statements that translate their current account balances into a stream of lifetime income.

Approximately 80% of plan sponsors currently provide retirement income projections for participants; however, there is inconsistency in how and where those projections are delivered.3 Prominently displaying income illustrations across multiple media may help reinforce the importance of retirement income planning for employees in all stages of their careers at all points of engagement. Work with service providers to verify the methodology behind those illustrations on statements, and ensure tools are consistent and clearly described.

2) Implementing a financial wellness program that addresses retirement readiness. The top three reasons plan sponsors cited for offering a financial wellness program to employees include:4
  • Improving their financial knowledge (30%).
  • Increasing their 401(k) plan contribution rates (27%).
  • Helping older employees with retirement income planning (23%).

Plan sponsors should collaborate with service providers on the best way(s) to measure the established wellness program to ensure they are not only improving outcomes for their participants, but for their bottom line, too.

3) Updating plan documents to ensure that they account for actions taken to support retirement income planning. Common adjustments to plan documentation include:
  • Establishing retirement readiness and income optimization for participants as key plan objectives.
  • Allowing participants to remain in the plan after retirement, and giving them the ability to take partial distributions over time, as opposed to a lump-sum distribution.
  • Incorporating language that supports adding income-generating solutions once the plan sponsor has done their due diligence.
  • Integrating third-party advice engines.

Collective growth

Plan sponsors will be a driving force in the effort to close the income gap, but it does not rest with them alone. To succeed, service providers, plan consultants and investment managers must make a collaborative effort. Leveraging industry partners to help navigate this emerging demand will not only help individual plans, but will continue to drive innovative solutions that ultimately improve outcomes. Below are some key questions to help begin the retirement income conversation with industry partners:

Defined contribution investment managers
  • What type of retirement income solutions do you provide, including products, tools, advice, etc.?
  • Do you have the ability to offer guaranteed (annuity-based) and non-guaranteed income solutions?
  • Do your solutions require assets to remain in the plan?
  • Do you believe additional regulatory guidance is needed?
  • Are your solutions tied to the qualified default investment alternative (QDIA) or default?
Service providers
  • What type of retirement income solutions do you provide, including products, tools, advice, etc.?
  • Do you integrate your retirement income products with financial wellness programs?
  • How do you provide participants with income projections? How do you generate those projections?
  • What are best practices when discussing retirement income in-plan communications?
  • Describe the process your firm takes to roll a participant out of the plan into an IRA?
Plan consultants
  • What type of retirement income solutions have you researched, including products, tools, advice, etc.?
  • How do you believe retirement income solutions should be integrated into a 401(k) menu?
  • Do you provide fiduciary services for the selection and ongoing monitoring of income solutions?
  • Do you recommend guaranteed income solutions?

Incorporating these types of questions into regularly scheduled meetings with industry experts is the first step in determining how to increase the focus on helping to close the gap on retirement income. Taking these steps not only benefits plan participants, but plan sponsors as well. A one-year delay in retirement age may increase annual workforce costs by an incremental 1.0%–1.5% to employers’ costs.5

Incoming products

There is more to retirement income than products alone. That why it’s important to outline the types of solutions coming to market, while reiterating that income solutions must be flexible enough to meet the diverse needs of retirees.

401(k) plans are gradually replacing defined benefit plans as the most prominent retirement vehicle

The bottom line

Solving for retirement income may not follow a consistent approach, but it does not have to be overwhelming. Plan sponsors should seek to formulate opinions on ways to incorporate income solutions into plans over a specified period of time, leverage support from defined contribution partners and determine the best way to measure the plan’s success. The result should be an enriched retirement offering that not only benefits employees, but can also improve the organization’s bottom line and be used to attract and retain talent.
 

Before investing, carefully consider fund investment objectives, risks, charges and expenses. For this and other information that should be read carefully, please request a prospectus or summary prospectus from your financial professional or Nuveen at 800.257.8787.

1 TIAA Lifetime Income Survey, October 2017.

2 The Cerulli Report: U.S. Retirement End-Investor 2018.

3 Callan 2018 Defined Contribution Trends Survey

4The Cerulli Report: U.S. Retirement Markets 2018.

5 Prudential Financial, “Why Employers Should Care About the Cost of Delayed Retirements,” 2017.

The principal value of the fund(s) is not guaranteed at any time, including at the target date. Mutual fund investing involves risk; principal loss is possible.

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.

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

Glossary

Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixedrate taxable bond market.

Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index measures the market of U.S. dollar-denominated, non-investment grade bonds and limits each issue to 2% of the index.

Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets.

Bloomberg Barclays U.S. Government Index is a market-value weighted index of U.S. government and government agency securities (other than mortgage securities) with maturities of one year or more.

Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index (Series L) measures the performance of the U.S. Treasury Inflation-Protected Securities (TIPS) market. Federal Reserve holdings of U.S. TIPS are not index eligible and are excluded from the face amount outstanding of each bond in the index.

Duration measures how long it takes, in years, for an investor to be repaid a bond’s price by total cash flows. Generally, for every 1% change in interest rates, a bond’s price will change approximately 1% in the opposite direction for every year of duration.

JPMorgan Emerging Markets Bond Index (EMBI) Global tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign entities.

Nuveen provides investment advisory solutions through its investment specialists. Nuveen Securities, LLC, member FINRA and SIPC.

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