Retirement Income Investment Options Change 401ks
Retirement income investment options appear to be the new focus of investment design architects for 401k and 403b plans. In addition to boosting participation through auto-enrollment features, plan sponsors are now focused on retirement income investment options. This goes hand-in-hand with keeping participants in the plan and continuing to serve them after they’ve retired. The retirement income investment options are a new emerging solution in retirement plans, which according to Institutional Investor, has “upside for plan sponsors and their employees,” even after those employees have retired.
According to PIMCO’s 13th Annual Defined Contribution Consulting Study, cited in a recent BenefitsPro article, 66% of retirement plan consultants and advisors have recommended that plan sponsors provide a retirement income investment option tier of investing to retirees. This means, instead of only offering a generic solution, the emerging tier of investing would offer a range of retirement income solutions designed to meet a wide variety of participant needs as plan participants transition into retirement.
BenefitsPro also noted that the consultants and advisors surveyed by PIMCO advocated for three additional ways plan sponsors could keep participants in DC plans post-retirement:
- Offering distribution flexibility (84%)
- Providing access to education and tools (41%)
- Adding retirement income options specifically for retirees (38%)
According to Rick Fulford, head of PIMCO’s U.S. Defined Contribution business, as referenced in the BenefitsPro article, plan sponsors are beginning to tailor in-plan retirement income solutions for participants who have already retired, and for those who are currently saving for their future. When it comes to the design for retirement income investment options, Fulford noted there is an emphasis on income generation and capital preservation. In addition, consultants and advisors are recommending single and multi-asset retirement income solutions, with some support for insurance guarantees.
When it comes to asset allocation in retirement income products, equity exposure is definitely more limited for retirees, with consultants and advisors recommending a less than 40% allocation to stocks. Moreover, 72% of those PIMCO surveyed recommend monthly distributions as a means of providing retirement income.
Plan sponsors are continuing to focus more on fiduciary duties in light of a shifting focus on retirement income. The PIMCO study found, most large and mid-sized consultants and advisors ranked reviews of target-date funds as the highest priority (63%), followed by evaluation of investment fees (44%), administration fees (28%) and simplification of investment menus (25%).
Their original intent of using IRS Code Section 401(k) was as a supplemental retirement savings vehicle. However, as employers phased out traditional pension plans, the 401k morphed into becoming the primary savings structure for Americans to save for the future. While the priority has historically been to encourage workers to put money into workplace retirement plans, now the industry focus seems to be shifting towards helping employees to prudently take money out of those plans. The 401k plan emphasis is now becoming, How can we assist the participant in creating a steady stream of retirement income.
According to Toni Brown, CFA and senior retirement strategist at Capital Group (which owns the American Funds family of mutual funds), who was quoted in the Institutional Investor article linked above, “Participants remaining in the plan during retirement should be able to make flexible, systematic withdrawals, provided at a reasonable fee, over a period of time. Further, participants should have access to investment options that are managed specifically for them when they are in retirement and taking these systematic withdrawals. Investing in retirement funds when periodic withdrawals are being taken is very different from investing when periodic contributions are being added. Taking money out rather than putting money in is a game changer from an investment perspective, in part because the risks of market declines and volatility become significantly more important. A 401(k) plan can offer investment options that are designed for retirees and that are liquid, durable, and understandable. Plan sponsors could also consider offering an annuity bidding platform out-of-plan so participants have reasonable access to guaranteed income options. Ultimately, providing retirees with access to guaranteed income out-of-plan, appropriate withdrawal options in-plan, and ensuring that the plan offers reasonable systematic withdrawals can go a long way toward creating an effective retirement plan.”
Adding retirement income investment options as a tier of investing to defined contribution plans could be another game-changer – similar to adding a sleeve of target-date funds a decade ago. Retirement income investment options are a topic for plan sponsors to think about and address.