A substantial portion of current retirees still retains 80% or more of their savings nearly 20 years into retirement, according to joint research from the Employee Benefit Research Institute and BlackRock Retirement Institute. While that is good news, the ability to preserve principal might be explained in part by access to additional sources of retirement income, robust markets and high bond yields early in their retirement years.
The next generation of retirees might not have the choice of leaving principal unspent. Not only are they living longer, they might not have similar access to additional retirement income and face a very different market environment. Relying on outdated income strategies or trying to live off investment returns alone might not provide enough cash flow to support the lifestyle participants expect.
For these future retirees, the unified framework provided by target-date funds might enable plan sponsors and providers to help participants grow their assets with retirement consumption objectives in mind. Such an approach may also support strategies for sustainably spending down savings in a way that factors in longer life spans and might significantly enhance the prospective utility of a target-date fund as an income solution.
The new frontier for auto features
Auto-enrollment and auto-escalation are commonplace now, but they once were seemingly radical ideas floated by behavioral finance academics. Today, these and other plan design elements have made retirement saving nearly automatic for many American workers.
Imagine if we could take the next step and introduce plan design features that could help a worker "auto-retire" at the end of her career as easily as she began to "auto-save" at the beginning.
Auto-retirement would almost certainly have to solve for retirement income. Making sense of retirement income options is one of the biggest obstacles prospective retirees face. It requires thinking about savings in a new way — not as a lump sum, but as a series of payments to one's self across decades. New findings show the extent of participants' need: In the 2018 BlackRock DC Pulse survey, 93% of participants said they would like guidance from employers about how much monthly income they could expect from their savings.
To be fair, plan sponsors recognize the problem. The survey found 87% feel responsible for helping support the retirement income needs of participants. Many have put in considerable effort looking for solution.
But what if an ideal retirement income solution is one that most plans already offer? We believe the solution might be to unlock the full potential of target-date funds as a retirement spending solution for retirees.
Building the auto-retire framework
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.
Anne F. Ackerley is a managing director at BlackRock Inc., New York, and head of BlackRock's U.S. and Canada defined contribution group. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.