The wide acceptance of target-date funds means a single framework encompassing a participant's ability to save and then spend in retirement is already in place for many defined contribution plans. If a retired participant has the option to remain in the fund and withdraw income rather than search externally for a retirement investing strategy, transitioning into retirement might be considerably simplified.
From an investment standpoint, the target-date fund can provide plan sponsors with an all-in-one solution for investing accumulating assets specifically to fund a decumulation objective. And according to the DC Pulse survey, plan sponsors are aware of this potential: 57% say their current target-date fund can be used as a decumulation vehicle for participants in retirement. So the question becomes: How can plan sponsors make the target-date fund part of an auto-retire framework?
There are four key questions plan sponsors may need to address in order to make the target-date fund a central pillar of their plans' retirement strategy:
1. Is the target-date fund designed for decumulation?Understand the fund's objective: Is it designed for decumulation? Does it take into account lifetime consumption patterns? The retirement vintage likely will need to balance growth and reduce volatility in order to provide consistent, long-term decumulation.
2. Does the plan's policy and record keeper support it? Many plans have not made provisions to allow flexible distribution options in retirement. Plan sponsors can review policy documents and work with record keepers to help provide consistent income for retirees. Most plans already default to the assumption that separated employees will stay in-plan and in-fund unless they choose otherwise.
3. Does the plan offer a retirement spending tool integrated with the target-date fund?
How participants spend down savings can make a significant difference in retirement quality of life as well as the challenge of making savings last. Not only do the market assumptions underpinning a strategy need to be current, they might need to factor in actuarial tables. Ideally, using a calculator that takes into account standard mortality tables in conjunction with your target-date fund's retirement vintage may provide participants with a careful, empirically grounded retirement spending plan.
4. Does the plan package the retirement income benefit in a way participants will understand?
While the logistics might have come together on your end, the resources must be presented to your participants as a streamlined benefit. For example, communicating to pre-retirees about the plan's target-date fund retirement vintage, retirement calculator and flexible distribution options can help participants make better informed decisions during their retirement years.
The challenge providers and plan sponsors face is finding the combination of plan design elements and behavioral finance insights that can fuel the next step, making retirement spending as automatic as possible. We believe the combination of target-date funds, plan policy and retirement spending insights examined here is the next step in simplifying financial wellness for participants.