Retirement Income for US DC Plans: Point of View 

Over the last decade, there has been a dramatic shift in the role played by defined contribution (DC) plans in the US retirement landscape. Initially, DC plans were intended to be a supplemental savings vehicle complementing defined benefit (DB) plans and social security benefits in providing income streams to participants in retirement.

However, as DB plans have gradually diminished, the responsibility for generating retirement income has shifted from plan sponsors to plan participants. Many Americans now face the dual challenge of saving for retirement and converting those savings into a sustainable income stream for their later years. Simultaneously, retirees are confronting myriad potential demands on that income stream – from supporting multiple generations to inflation to longevity.

 In light of this evolving dynamic, we believe plan sponsors should take proactive steps to ensure their retirement plans are equipped to address the challenges of providing income throughout retirement.

 The retirement income landscape can be overwhelming given the wide array of investment products and solutions available, many of which are complex and unproven at this point. Retirement income solutions also encounter several challenges in adoption, such as fees (both implicit and explicit), integration with recordkeepers, and effectively communicating product offerings to participants, among others. Compounding these difficulties is the reality that no single solution is likely to meet the diverse needs of all participants, as individuals have varying goals, risk profiles, and longevity expectations.

Therefore, plan sponsors undertaking this objective must be prepared to take a multi-pronged approach. This approach can leverage existing investment options available to participants, utilize services and advice provided by the plan’s recordkeeper, and if necessary, consider adding dedicated investment options from which participants can choose.

A one-size-fits-all solution will not satisfy the diverse needs of every participant. The term "retirement tier" encompasses a range of options, from simple measures (such as allowing participants to remain in the plan after retirement and take partial withdrawals) to more comprehensive offerings that include a mix of tools, resources, advice and solutions. Before introducing a "retirement tier", plan sponsors should assess the existing resources available to support participants in converting their accumulated assets into retirement income. The key is to provide offerings that resonate with retirees and near-retirees, ensuring that the solutions are clear, engaging and relevant. Without this, the proposed solutions are unlikely to gain traction among participants. Therefore, effective communication strategies are critical in driving the use of retirement income solutions.

An approach to retirement income may include one, or all, of the categories below, depending on the objectives and investment philosophy of the plan sponsor. 

Following a prudent process can help plan sponsors understand the varying retirement income solutions, resources and tools available to their plan. 

^₂ Annuity guarantees are subject to the claims-paying ability of the issuing insurance company.

For these retirement income investment solutions, recordkeeper integration and portability is critical. The availability of options may be supported or restricted by the recordkeeper’s capabilities and portability. Moreover, the success of many of these capabilities requires these systems and third-party providers to be able to seamlessly integrate and interact with the recordkeeping platform. Educating participants on the potential role these different investment options can play in their portfolio creation is also paramount in building a retirement tier that effectively serves retirees when combined with plan design features, tools and advice solutions. While educational documents may provide a simplistic overview, interactive tools and interfaces that show retirees’ projections of their savings over retirement are necessary to understand the impact of spending habits or solutions on the dollars saved over a career. 

Retirement income solutions can play a vital role within defined contribution plans and plan sponsors should consider incorporating plan design and investment solutions. Plan sponsors who have yet to embark upon retirement income education and objective setting may find themselves falling behind in the near future.

In summary, Mercer believes:

Plan sponsors should define their objectives for offering a retirement income solution. Analyzing participant demographics and assessing employee needs is a critical part of this process.

• Communication is the most critical aspect of facilitating and supporting participants’ transition into retirement and standard communications have notable room for improvement.
• Plan sponsors should provide flexible withdrawal options, like partial or systematic withdrawals.
• Most fiduciaries already offer the critical building blocks of the investment portion of the retirement tier in their plans, like target date funds, stable value and managed accounts.
• Annuity-backed investment options can play a role in decumulation, but they are probably not appropriate for all DC plans at this time. Significant hurdles and considerations need to be addressed on a case-by-case basis.
• Plan sponsors must understand the potential risks, solution complexity and additional responsibilities they may face and the risks for participants if a new solution is offered. Education on retirement income may lead some plan sponsors to conclude that offering a new retirement income solution is not warranted for several reasons, such as a sponsor’s unwillingness to assume additional responsibility and fiduciary risks, disinclination to offer a complex solution, and potentially unknown risks for the participants.

Participant retirement success is dependent on careful and thoughtful collaboration with recordkeepers. Retirement income is no different. Any discussion about retirement income should start with a thorough understanding of the current capabilities and limitations of the recordkeeper. Mercer believes a multi-pronged approach may be necessary for most DC plans to meet the diverse needs of all participants.

Please see important notices.

_{¹ Guaranteed refers to investment solutions that have an embedded annuity component. Any guarantees are subject to the claims-paying ability of the annuity provider and should be carefully evaluated.}

_{² Annuity guarantees are subject to the claims-paying ability of the issuing insurance company.}