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Growing Trend in Retirement Plans: Retirement Income Solutions

Both plan sponsors and participants want options that generate and manage income in retirement. How can retirement plans best add these capabilities?

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Market analysis and surveys1 show that Americans across all generations want products designed to generate retirement income. Yet traditional pensions continue to fade as retirement plans continue to shift from defined benefit (DB) to defined contribution (DC) structures. Add the complications of people living longer with evolving spending habits in unpredictable economic markets, and it’s easy to see why creating strategies to optimally spend and sustain retirement savings is becoming increasingly important and challenging.

To meet this growing demand, several products have come to market offering to add guaranteed income and flexible spending strategies to plans – but most may not satisfy all essential needs for sponsors or participants.

How can individuals, plan sponsors, and consultants best appraise and implement these new solutions? For insights, we spoke to Matthew Soifer, Head of Distribution in BlackRock’s Retirement Group, and Nick Nefouse, Head of Retirement Solutions in BlackRock’s Multi-Asset Strategies & Solutions team and Head of LifePath®, BlackRock’s global target date franchise.

What are you hearing from DC plan sponsors and participants regarding the trend toward income solutions and more flexible draw down options?

Matt Soifer: We’re seeing tremendous demand from both clients and the leading investment consultants. Our latest DC Pulse Survey reflected this; 96% of plan sponsors said they feel responsible for helping participants generate or manage income in retirement, and almost 90% of participants said they’re interested in products designed to do so. There’s almost perfect alignment.

Further, with a tight labor market, companies are increasingly looking to recruit and retain talent with attractive benefits. What do people want in retirement? Consistency of cash flow, the ability to budget, and protection against volatility. And they want these to last a lifetime. No matter how big or small their nest egg is, people want guarantees.

Matt Soifer

Matt Soifer

As sponsors consider income strategies, which make the most sense?

Matt Soifer: As an overall market strategy, we need to stop treating 401(k) plans as just retirement savings plans and start treating them as retirement plans that encompass both savings and spending.

Nick Nefouse: There’s a spectrum of strategies and products available in the market that are designed to help individuals generated retirement income – they basically range from simple yield-oriented investment options coupled with a four-percent spending rule to whole portfolio solutions wrapped in insurance contracts – with a wide array of offerings that fall somewhere in between. No one approach is perfect and each has tradeoffs.

A sponsor’s need to assess their plan participants and make sure they have investment options that can help them meet their needs which – when it comes to addressing retirement income – is a daunting task given the wide spectrum of income strategies on the market. Retirement plans have offered various forms of income products for decades. However, they haven’t been easy to use, and most participants aren’t financially sophisticated enough to understand them. We believe cost-effective solutions that emphasize simplicity and build upon a DC plan’s qualified default investment alternative and automated features – such as auto-enrollment and auto-escalations – will be most effective.

Where do you see this trend going?

Nick Nefouse: The next evolution in retirement plans will be embedding income solutions into target date funds. Why? First, they’re already where the money is going; 85% of participant contributions are predicted to be invested in target date funds or similar professionally managed accounts this year.2 Second, I believe most participants understand the basics of target date funds. I think if you ask about them, people will typically say they’re professionally managed and diversified, and that they automatically rebalance and are relatively low-cost. All accurate.

So why wouldn’t we want to add an income component to these funds? Specifically, we’re adding the option for a lifetime income stream to the LifePath target date franchise.

Nick Nefouse

Nick Nefouse

When do you think income options like this will be standard in plans?

Nick Nefouse: We believe there will be serious momentum within 5 years and it will become standard in plans within 15 years. Consider that there was very low acceptance of target date funds 15 years ago prior to the Pension Protection Act (PPA). Now, the vast majority of assets going into 401(k)s are invested in them. Mark my words: By 2030, and likely much sooner, most plan participants will be invested in whole portfolio solutions that offer the option for a lifetime income stream.

Matt Soifer: I agree. And I think most of the externalities that could affect this evolution will be positive rather than negative, such as the recent enactment of the SECURE Act and the ongoing legislative effort to allow collective investment trusts as investment options for 403(b) plans.

Also, within the next few years, expect to see more transparency from retirement income products in helping participants project what their actual income stream will be. We’ll be able to embed more concrete information into the analytical tools to predict income streams with greater accuracy, allowing people to have much stronger foresight in planning.

Bottom line, we believe solutions we’re creating now at BlackRock are going to disrupt how plan sponsors and participants receive income for life.

What might plan sponsors want to consider when assessing retirement income solutions?

Nick Nefouse: First, consider what is your specific perspective is on delivering retirement income for your participants. If you decide you don’t want to do it given your plan’s current structure, ask yourself what you would offer if you were designing the plan from scratch. Or what is your best alternative? It may be helpful to define what success means for your plan.

Second, there are three factors to consider when selecting an income solution: Participant spending, volatility of spending, and longevity. Any income solution would ideally address all three factors as effectively as possible – with tradeoffs that are appropriate for your needs – while also being simple and cost-effective.

Matt Soifer: There are several products in the market that solve for one or maybe two of those three factors, but they may not be the best solutions for many plans. For example, some solutions may only solve for longevity, but it comes at the expense of liquidity. Or participants in a managed payout fund during times of high volatility may struggle with spending and planning. If you solve for just one of the risks Nick mentioned, a participant may have major exposures to manage while they are in retirement.

How can BlackRock help plan sponsors?

Matt Soifer: BlackRock pioneered target date investing decades ago and we have a robust target date franchise. We also have the analytical power and risk management capabilities via our Aladdin• platform allowing us to work with plan sponsors as they seek to design and manage their plans with greater control and more advanced forecasting. Ultimately, we seek to understand the challenges and objective for each plan client, then iterate rigorously towards potential solutions.

Learn more about retirement income solutions.

1 According to BlackRock’s DC Pulse 2021 Survey

2 Target date funds are predicted to capture 85% of participant contributions by 2021: Sourced from P&I and Callan

This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the global retirement landscape. The opinions expressed herein are subject to change at any time due to changes in the market, the economic or regulatory environment or for other reasons. The material does not constitute investment, legal, tax or other advice and is not to be relied on in making an investment or other decision.

Investing involves risk, including possible loss of principal. Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal. Investment in target date funds is subject to the risks of the underlying funds. The target date is the approximate date when investors plan to start withdrawing their money. The blend of investments in each portfolio is determined by an asset allocation process that seeks to maximize assets based on an investor’s investment time horizon and tolerance for risk. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (with less equity exposure) over time as investors move closer to the target date. The principal value of a fund is not guaranteed at any time, including at and after the target date.

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