27 August, 2019

For many years now, close observers of the retirement industry have recognized that defined contribution (DC) plans do not naturally help retirees match their cash flow needs in retirement. DC plans, particularly when offering a combination of auto-enrollment, target date funds, and auto-escalation features, have done an ever-improving job of accumulating assets that can be used in retirement. However, when employees retire, what happens next? I recall seeing an Edward R. Murrow-inspired cartoon caption years ago showing a lonely retired employee leaving the office that simply read, “Goodbye and good luck.” Is that the best we can do for our coworkers at the end of their careers?

Understanding the plan-sponsor perspective


Anna Rappaport, who chairs the Society of Actuaries’ (SOAs) Committee on Post-Retirement Needs and Risks and the Steering Committee for the Aging and Retirement Strategic Research Program, recently interviewed me to share what we have been seeing in the DC market with regard to retirement income.


The full SOA interview is available here, but this post highlights three key income-related issues:


  • Plan sponsors’ efforts to provide in-plan income options are still in the early innings. We are seeing plan sponsors being more amenable to encouraging retirees to stay in the plan and draw income over time. But limited progress has been made in terms of incorporating post-retirement options that generate regular payouts of income. While the article references a 2018 PIMCO study, since then we have seen the updated 2019 results, in which a significant number of plan sponsors are believed to be either indifferent (33%) or actively opposed (6%) to retaining retirees in their plans.[1]
  • Structural obstacles to offering in-plan income options complicate adoption. Several significant barriers continue to stand in the way of employers doing more, yet I don’t believe any are insurmountable. In 2018, I presented the results of a Defined Contribution Institutional Investment Association (DCIIA survey on DCIIA’s behalf at the ERISA Advisory Council). No big surprise, but the absence of a fiduciary safe harbor was highlighted as a key issue, and one that would in theory be addressed by the Setting Up Every Community for Retirement (SECURE) Act. Unfortunately, although the SECURE Act blew through the House (voting 417 to 3), it has not been able to move through the Senate.
  • Incremental progress could be made by nurturing “the retirement tier.” This latest buzzword is an all-encompassing term that brings in any product, solution, tool, or service that simplifies or facilitates the decisions that need to be made by plan participants prior to, at, and during retirement to meet their cash flow needs. Importantly, proponents of the retirement tier recognize that we cannot expect plans to provide a totally comprehensive solution that addresses all needs of all retirees. That said, there is nothing wrong with plans taking one small step at a time and ultimately, over time, building a more comprehensive income solution.

Important first steps for plan sponsors

One of the topics Anna and I explore in some depth are the most critical action steps that plan sponsors can take to advance the provision of in-plan income solutions.


Here are two of the most critical:


  1. Sponsors need to decide whether or not they wish to encourage retirees to stay in plan, and more specifically, whether they want to amend their plans to allow retirees to take partial withdrawals. It has been surprising to me when talking to plan sponsors how many do not even know whether or not their plans allow for partial withdrawals.

  2. Sponsors also need to understand what post-retirement features their recordkeepers can support. The recordkeeper has a key role as the connection point with participants and retirees.

In the meantime, it’s been heartening to hear that more plan sponsors are interested in tackling these retirement-income challenges than ever before. Let’s all hope we can convert that interest into action. Certainly, passing the SECURE Act would help.

Neil Lloyd
Neil Lloyd

Partner, Head of DC and Financial Wellness Research, Mercer

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