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How plan sponsors can crack the retirement income code

As the defined contribution industry has evolved over the last couple of years, income security has replaced retirement savings as the hot-button topic among plan sponsors and their participants. In this environment, employers face several hurdles in helping their employees have sustainable income in retirement, from investment options to education to the advent of new technologies. In this Q&A, Dan O'Toole, senior managing director and head of institutional investment solutions at TIAA, and Tim Walsh, senior managing director of institutional product at TIAA, discuss how the industry is working to meet these challenges.

Dan O’Toole
Senior Managing Director Institutional Investment Solutions & Research

Tim Walsh
Senior Managing Director, Institutional Investment & Endowment Distribution

P&I: What are the biggest challenges facing employees today in terms of retirement security?

Dan O'Toole: Defined contribution plans continue to be focused on wealth accumulation and building a sufficient balance. We believe strongly that a DC plan's purpose ought to be around providing a predictable and reliable level of income in retirement.

There are also a lot of risks that participants need to solve for, including savings, interest-rate and market risk. However, additional risks need to be considered, like longevity, cognitive and behavioral risk, in the form of inopportune buying and selling in the midst of market cycles.

P&I: How are employers addressing those challenges?

Tim Walsh: Participants need access to the right investment solutions, packaging and personal advice to build a portfolio that will get them to and through retirement. We believe fiduciaries need to design plan investment menus with an income foundation that includes diverse and competitive low-cost options.

When we work with a plan sponsor or their consultant, we ask: Is it the goal of your plan to help participants enhance wealth, to make sure that participants have access to investment products that are beating their index benchmarks or, as we propose, to help ensure that participants have a dignified retirement and don't outlive their savings? The answer to these questions can have a significant impact on a plan's menu design.

P&I: How can employers help stem the problem of early withdrawals, and what are the implications for employees' retirement savings?

O'Toole: Some sponsors have addressed early withdrawals by making sure their retirement plans are as modern in plan design as they can be. Progressive sponsors are evaluating the qualified default investment alternative for more personalization to the participant, as well as plan design features like auto enrollment and auto escalation of contribution rates that seek to deliver higher levels of individual success and thus more plan buy-in by participants.

Leading plan sponsors are also trying to understand what's happening more deeply at a participant level. For example, are there groups of participants that may be not tracking to desired levels of replacement income in retirement, or are they over concentrated in a particular investment relative to their age or circumstances? In those instances, sponsors are looking at what actions or messages they might direct at participants to encourage them to take corrective action.

P&I: Are target-date funds enough to help employees not only to retirement, but in retirement, when they are withdrawing assets?

Walsh: Target-date funds may not adequately address all the real risks participants face during accumulation and then through retirement. There's a lot of talk about traditional risks like market risk and interest-rate risk. There is also a new and real risk that's rising as our country ages, and that is cognitive risk. But one of the most important risks that can be easily overlooked is longevity. Baby boomers are retiring and people are living longer. Today, a 65-year-old couple has a 94% chance of at least one spouse living to age 81 and a 75% chance of living to age 88.2.i So there is an opportunity in the industry to create unique and innovative solutions that can provide the lifetime income participants want, and think they will get.

P&I: Technology has been brought to bear in many areas of retirement planning, from plan design to employee communication. What areas are employers missing?

: O'Toole: There have been notable improvements powered by technology that have enabled plan sponsors to select some investment options that include higher degrees of personalization and income generation, while simultaneously addressing more of the risks that participants are exposed to. Some of these technology-powered solutions include custom target-date models or portfolio services, and many plan sponsors are missing out on these new opportunities.

P&I: Are there any specific barriers that plan sponsors face when attempting to modernize their retirement plan?

O'Toole: There is a lot of information in the marketplace on retirement plans, and much of it conflicts when it comes to plan design objectives and oversight. For example, there is tremendous focus in DC plan design on maximizing low-cost accumulations from a well-diversified set of investment solutions. Yet some participants may be unable to manage their plan choices to produce their desired level of income in retirement.

Walsh: We think there's been some excellent support and nudges from regulators in notices and guidance letters around income solutions, but the bottom line is that education is critical. In-plan income solutions are easy to use and may be less expensive than retail solutions. We have an opportunity in the marketplace to educate 401(k) and 403(b) plan sponsors about the availability and benefits of these types of options.

P&I: What are some of the features plan sponsors have been successful in using to modernizing their plans?

Walsh: Beyond modernizations such as auto enrollment and auto escalate, there has been more emphasis on investor literacy, education and advice, which are critically important. As an industry, we are also looking for opportunities to make it easier for participants to get educated about financial topics. One area where we have seen success is with financial games. Gamification allows us to engage participants in a fun and interactive way while providing them education on retirement and financial issues.

This sponsored investment insights is published by the P&I Content Solutions Group, a division of Pensions & Investments. The content was not written by the editors of the newspaper, Pensions & Investments, and does not represent the views of the publication, or its parent company, Crain Communications.