The Plan Sponsor’s Guide to Retirement Income, updated for 2024-25, is a resource for defined contribution plan sponsors to assess and implement solutions for retirement income that help plan participants improve their financial security through their savings and decumulation years.

Each section offers practical guidance on setting plan objectives, deciding on the plan design that addresses the unique needs of participants, and evaluating and adding lifetime income solutions. Participant education, a key aspect of successful uptake of these solutions, and fiduciary issues for plan sponsors are highlighted as well.

In this Guide, AllianceBernstein (AB) shares insights from more than a decade of experience as well as its comprehensive research to offer best practices for approaching the different types of solutions. Additionally, the Guide explores key considerations for plan sponsors in the decision-making process and describes a case study of a successful recent in-plan implementation.

I

PLAN OBJECTIVES

DC plans today have broadened their focus from simply being savings vehicles to helping their participants generate sustainable income in retirement. They are joined by product providers and regulators in an industry-wide effort to support and deliver a broad range of solutions for guaranteed income that are designed to help bridge the looming savings-to-retirement income gap.

The imperative to deliver guaranteed income for employees in their retirement years is widely understood and, in fact, reinforced by ongoing industry research that shows plan participants would value that benefit. But it can be overwhelming for plan sponsors not only to grasp the complexities of unique financial circumstances of participants but also to understand and evaluate the many available solutions.

To that end, plan sponsors and investment committees are having thoughtful discussions regarding their plan philosophy as well as taking tangible steps toward adopting guaranteed income solutions.

Visit: AB's Lifetime Income Solutions

As the primary retirement savings vehicle for most employees today, DC plans have made significant strides in helping participants optimize their savings during their accumulation journey. Now, the attention is on the decumulation phase in retirement and helping participants access sustainable income throughout their lifetime.

Aging populations, combined with longer lifespans, are driving the urgency: More than 2.1 billion people globally will be over 60 years of age by 2050, almost double from 2020.¹ These future retirees will have to make their savings last over a period of 20, 30 or more years.

We believe plan sponsors are paying greater attention to the impact that increasing lifespans can have as they consider their retirement income approach.

Jennifer DeLong

SVP, Managing Director and Head of Defined Contribution, AB

“While these numbers are staggering, what’s most alarming is that the next wave to reach this milestone [younger millennials and Gen Z] have an even higher likelihood of living closer to age 100, or even longer,” said Jennifer DeLong, SVP, Managing Director and Head of Defined Contribution at AB. “We believe plan sponsors are paying greater attention to the impact that increasing lifespans can have as they consider their retirement income approach.”

In addition, as employers today prioritize talent acquisition and retention, offering lifetime income benefits can be a significant draw. It provides near-retirees with a sense of financial security so that they can retire “on time,” opening up advancement opportunities for less tenured workers. According to an Accenture survey, 78% of workers and retirees said that having pension benefits was a critical factor in deciding whether to accept a job.² “So providing a guaranteed lifetime income benefit — that certainty of income in retirement — can really be a way to attract employees to your own organization,” DeLong said.

While retirement confidence has remained relatively steady despite economic, public health and political headwinds over the past several years, it is currently nowhere near pre-pandemic levels, according to AB’s 2023 survey, Inside the Minds of Plan Participants.³ Only 35% of participants said they were confident or very confident about retirement, which is lower than the high point of 47% in 2018. Yet the current level of confidence is notable, given the swift and strong rise of inflation — which hadn’t been a major factor for more than 30 years, DeLong said.

In fact, inflation worries were a top priority for the roughly two thirds of respondents (64%) who lacked confidence about retirement. “Participants who have felt the abrupt sting of inflation now realize it’s not just an afterthought but a necessary calculation as they save for retirement,” said DeLong.

When asked about their biggest financial concerns in retirement, an alarming 82% of participants in the AB research said that inflation — and its potential to erode the value of their savings and affect their purchasing power — was their top worry. That was far ahead of worries over whether they had saved enough to live comfortably in retirement (68%) or fearing a market crash right when they were ready to retire (44%).

In the survey, participants’ most important goals when saving for retirement have been consistent: to create a steady income stream, to protect principal and to take advantage of market growth. “We found that these needs don’t change when participants actually retire — especially in light of increasingly longer lifespans,” DeLong said.

Read: DC Plan Participants Want Lifetime Income…but Need Help

Another key data point for DC plan sponsors to keep in mind is that a majority of DC plan participants have unrealistic expectations about the amount of sustainable income in retirement that their DC plan can deliver, according to the AB research.³ “Overall, people greatly overestimate what they can spend [in retirement], and without help, many may end up running out of money and having a problem in retirement,” DeLong pointed out.

Participants trying to generate income in retirement without using insurance can face poor inflation-adjusted investment outcomes and increased uncertainty about outliving their assets.

Andrew Stumacher

SVP and Managing Director of Custom Defined Contribution Solutions, AB

Given that participants are expected to live longer and need financial security through their retirement years, embedding a guaranteed income solution into the DC plan can be an effective path. It can help to significantly reduce longevity risk by providing a sustainable withdrawal rate through retirement versus a withdrawal approach that participants do on their own, which may not be as well planned.

“Participants’ spending power in retirement will be severely impaired if the income amount doesn’t grow over time, or even if it doesn’t grow enough to offset inflation,” said Andrew Stumacher, SVP and Managing Director of Custom Defined Contribution Solutions at AB. “Participants trying to generate income in retirement without using insurance can face poor inflation-adjusted investment outcomes and increased uncertainty about outliving their assets.”

As plan sponsors start down the evaluation path for retirement income vehicles, AB’s research³ also points to a strong preference by participants for two features: growth potential and easy access. When asked to select one of two choices in retirement, either:

Two-thirds (68%) of DC plan participants took the first choice and were willing to forgo an additional $10,000 per year in guaranteed income in exchange for potential growth and access.

“Participants continually tell us that they want to retain control over their assets — allowing access in case of an emergency, for example — along with access to potential market growth. These priorities help us design solutions that participants will want to use,” DeLong said.

As they delve further into addressing the retirement needs of their plan participants, DC plan sponsors also find that incorporating lifetime income solutions can help with related plan objectives. These include:

Read: As Workforce Sentiments Change, Retirement Income Needs Haven’t

II

PLAN DESIGN

DC plan sponsors can take a methodical, participant data-based approach to determine the appropriateness of lifetime income solutions and how best to introduce them for successful uptake.

Sponsors first need to determine the overall plan philosophy: Either solve the retirement income challenge for employees via a default solution or take the choice approach that gives them solutions to consider, said Stumacher, adding that the decision will have a clear impact on usage. That’s followed by a suitability assessment with several elements:

AB offers a practical, step-by-step checklist to help plan sponsors think sequentially through the different aspects of suitability of retirement income solutions for their plan participants (see visual).

Alongside the plan objectives that bear on the decision to introduce lifetime income solutions, DC plans should also leverage their participant data to determine:

Starting earlier, and buying guaranteed income over time, allows not only for a smoother overall experience for participants, but also reduces the risk of bad luck with respect to the market environment at retirement.

Andrew Stumacher

SVP and Managing Director of Custom Defined Contribution Solutions, AB

It’s important to use a framework based on individual outcomes, not the outcome for the average participant, said Chris Nikolich, Head of U.S. Glide Path Strategies for Multi-Asset Solutions at AB. DC plan participants react differently to potential market outcomes and exhibit varied lifespans, which could produce vastly different investment outcomes versus a typical defined benefit plan population.

“You can't think about the average, because that excludes a very large portion of the population — there is no such thing as the average participant” in a DC plan, Nikolich said. For instance, “sponsors might assume everyone’s dying at their actuarial expected age of death, but a quarter of participants will live to be age 93 or beyond while, unfortunately, a quarter of participants will die before 80.”

The first thing that plan sponsors should do is take off their defined benefit hats and use a framework focused on individual outcomes, not the outcome for the average participant.

Chris Nikolich

Head of U.S. Glide Path Strategies for Multi-Asset Solutions, AB

Read: Painting a Fuller Picture: A Framework for Comparing Lifetime Income Solutions

When reviewing both non-guaranteed and guaranteed solutions, plan sponsors should evaluate considerations around income certainty, growth opportunity, simplicity, portability, control and flexibility for participants.

As interest in retirement income solutions continues to grow, record keepers are a crucial partner in delivering retirement income solutions in a DC plan. Advances in middleware technology have enabled the conversion and standardization of data among record keepers, insurers and asset managers, each of whom utilize different platforms, Stumacher said.

But the pace of implementation of income solutions by some record keepers has been impacted by the passage of SECURE 2.0 as they have understandably been focused on supporting a broader range of regulatory initiatives for their DC clients. “Plan sponsors can take a proactive role by talking with their record keepers to ensure that the solutions they’re interested in are currently available, or will be available, in the future,” Stumacher said. In fact, plan sponsor demand was the primary factor for 86% of record keepers driving specific retirement income solution development in 2024.¹

III

ASSESSMENT AND IMPLEMENTATION

A wider range of retirement income solutions is available today for DC plan sponsors to understand and assess, including those that utilize insurance. Among their key considerations are investment and cost issues, fiduciary requirements and implementation decisions. Using a comprehensive framework for the evaluation process can provide insight and direction to help plan sponsors follow a prudent process as plan fiduciaries.

Read: Leveling the Retirement Income Playing Field: A Comprehensive Framework for Evaluating Diverse Lifetime Income Options

It’s important to use a framework that weighs the potential outcomes against the complete costs of each approach — all through the lens of the participant.

Chris Nikolich

Head of U.S. Glide Path Strategies for Multi-Asset Solutions, AB

In response to industry demand for income solutions, target-date fund construction has also become more sophisticated, with customized approaches that can address individual participant needs. A major consideration for plan sponsors is how the solution will be implemented within the plan, besides looking at fiduciary issues and participant uptake.

Lifetime income solutions provide the option to convert an individual’s savings into regular guaranteed income payments over their lifetime. Additional considerations — each with its own trade-off — also need to be considered:

Read: Apples and Oranges: Understanding Lifetime Income Options 

Both AB’s Lifetime Income Strategy and Secure Income Portfolio utilize a guaranteed lifetime withdrawal benefit, or GLWB. It combines the income certainty of a guaranteed solution with the growth potential, liquidity, and flexibility of a non-guaranteed solution —attributes that have been consistently ranked highest by participants in the firm’s annual surveys. “When we embed a guaranteed-income portfolio into a target-date fund, it allows us to maintain a higher equity allocation throughout retirement while also realizing the benefits of insurance and generating a sustainable income for life,” said Howard Li, VP and Senior Research Analyst, Multi-Asset Solutions at AB.

Notes: For illustrative purposes only. As of June, 30, 2022. Some GLWB products may have a less beneficial step-up feature that is assessed less frequently. Guarantees are based on the financial strength and claims-paying ability of each insurance company.       

Source: “Leveling the Retirement Income Playing Field: A Comprehensive Framework for Evaluating Diverse Lifetime Income Solutions,” AB, released June 2023.

“GLWBs can be used in-plan and in the default option,” said Nikolich, which helps plan sponsors move past the considerable challenge of ensuring adequate participant uptake. “Utilization of most other forms of insurance can be used only out of plan and they require a participant to opt-in.”

While some DC plans would find a lifetime income solution most appropriate as a default feature, others may pursue adding it to the core menu or via a managed account for participants who tend to make asset allocation decisions on their own. Sponsors should consider that, “while core-income strategies, including income, balanced or even stable-value funds, provide current income, they do not provide a guarantee of lifetime income,” Nikolich said.

DC plans have seen significant success in the adoption of automatic features and the use of QDIAs in the savings phase: Two thirds of plan sponsors in a DCIIA survey¹ reported “direct and attributable” benefits from using auto-features — including higher participation, faster asset growth and improved participant behavior. Given that success, and with the SECURE Act safe harbor provision, the inclusion of income solutions in the default may be the way to go.

“At AB, we believe a default solution is the most efficient way to provide a guaranteed-income stream to participants who are not equipped to do this on their own,” said DeLong. “It harnesses participant behavior to take what works— automated features and a predetermined path — and makes it simple. It’s also the best way to achieve widespread adoption.”

IV

LIFETIME INCOME

When we embed a guaranteed income portfolio into a target-date fund, it allows us to maintain a higher equity allocation throughout retirement while also realizing the benefits of insurance and generating a sustainable income for life.

Howard Li

VP and Senior Research Analyst, Multi-Asset Solutions, AB

The marketplace for guaranteed lifetime income solutions has expanded significantly in the past five years. A practical evaluation of these solutions starts with understanding their varying characteristics:

“It’s also important to note if there is flexibility to change access to income solutions offered in cases of, say, employee promotions or other transitions,” said Stumacher.

Since the Pension Protection Act was passed in 2006, the success of default mechanisms in DC plans, such as auto-enrollment and auto-escalation, has been evident from the growth in participant savings.

“There’s a reason that SECURE 2.0 went as far as mandating auto-enrollment and auto-escalation” for any new plan starting in 2025, Stumacher said. Having a guaranteed-income solution in the default carries these automated features over to the distribution phase, which can help participants achieve the income security and flexibility they want.

“There’s a big misconception that a default option is a one-size-fits-all solution. It doesn’t have to be,” said Nikolich. “In fact, there may be the ability for the individual participant to tailor a couple of important guaranteed income factors, such as when they expect to retire and how much income they need in retirement.”

Plan sponsors that are considering using a lifetime income solution as the plan’s default — regardless of whether they elect to have participants opt-in or opt-out — should confirm that the solution under consideration qualifies as a QDIA, he noted.

Total costs for lifetime income solutions include explicit disclosed fees as well as some implicit costs that may not be immediately transparent. “Like the hidden part of an iceberg, these may not be easy to see and can be significant,” said Li.

Implicit costs can be difficult for participants to understand. For example, a single-premium fixed annuity does not have a fee because it requires participants to surrender their annuitized assets, so there are no assets against which to charge the fee. However, participants face a significant mortality-risk cost, because those who die younger than expected don’t receive the benefits after death, nor do their beneficiaries.

Read: Lifetime Income Fees vs. Costs: Look Beneath the Tip of the Iceberg

Participants also assume a growth opportunity cost as a result of the reduction in growth assets. For instance, a single-premium fixed annuity is an irrevocable decision that can result in opportunity cost and a lack of flexibility. “Participants may not understand that they’ve given up their ability to invest those assets in the market over the long term, as well as the ability to change their mind,” Stumacher noted.

In contrast, a GLWB, which is an income insurance wrapper of a participant’s own portfolio, has an explicit annual premium just like any typical household insurance policy. It has no other hidden costs because the assets stay invested, Li said. “In fact, the total average cost of an integrated solution with a GLWB can potentially be reduced to zero because the higher exposure to growth can offset the premium.”

As more plan sponsors evaluate the retirement income solutions available today, many are looking for more flexibility in the ways they can implement these solutions. AB provides plan sponsors with two solutions that deliver guaranteed income to participants in a variety of flexible ways:

The AB Secure Income Portfolio has been a core component of AB's comprehensive Lifetime Income Strategy for more than a decade, and DC plans now have the option to leverage it on its own, separate from AB’s glidepath. The AB Secure Income Portfolio adapts to plans’ diverse needs and preferences — whether it’s alongside a plan’s existing target-date fund, as an allocation in a managed account or in a “do-it-yourself” approach where participants can select AB's Secure Income Portfolio from their plan’s core menu.

Read: AB Lifetime Income Strategy: Unlocking Retirement Income

Read: AB Secure Income Portfolio Overview

“There's not a one-size-fits-all for participants. There's not a one-size-fits-all for every plan sponsor either,” said Nikolich. “We’ve talked to many sponsors who were looking for a guaranteed income solution that could be part of the default, now or in the future. Yet they weren’t ready, or especially inclined, to go through the significant work needed to change target-date providers. Offering the AB Secure Income Portfolio on its own just made a lot of sense.”

While AB’s Lifetime Income Strategy is intended to be a default solution, participants can select the level of guaranteed income they want and at what age they will retire. It includes the AB Secure Income Portfolio, a GLWB structure that permits flexibility, revocability and portability, which allows beneficiaries to keep assets if the participant passes away early.

Participants can realize lifetime income without giving up the growth or liquidity of a target-date fund. Also, it is one of the only in-plan guaranteed-income solutions backed by multiple insurers, providing built-in fiduciary protection for plan sponsors. “For AB’s Lifetime Income Strategy, we have up to five insurers participating in our solution. They compete quarterly for new inflows and we diversify among them, giving plan sponsors the option for AB to act as the ERISA 3(38) fiduciary, which not only lessens their time and resources burden, but helps plan sponsors retain their safe harbor status,” said Stumacher.

Read: How Should DC Plans Deliver Lifetime Income to Typical Participants?

V

EDUCATION AND COMMUNICATION

Annuities can be challenging for DC plan participants to understand, which makes education and communication particularly important in order to achieve successful uptake. Plan sponsors need to work closely with their providers to ensure participants receive the appropriate education, followed by regular communication, throughout all the engagement points that participants have with lifetime income solutions.

We always recommend meeting participants where they are. People learn in different ways, and they like to communicate in different ways.

Jennifer DeLong

SVP, Managing Director and Head of Defined Contribution, AB

Use clear language        
Best practices in the shift from retirement savings to retirement income include the use of simple, clear descriptions across several different types of communication materials so that participants have several touch points.

Some participants may prefer top-line information that summarizes the product, how it works and key benefits. A short e-mail, video or — for those not on digital platforms — mailing an old-fashioned postcard for an information session may be most effective. Other participants may look for detailed information, with technical details provided in longer brochures.

For all participants, easy access to live information sessions, either virtual or in person, call centers and personalized planning tools are key aspects of a participant-communication program.

Make it interactive        
Currently, as mandated by the SECURE Act, plan participants see an estimated income in retirement number, based on their current savings rate, on their annual DC plan statement.

In addition, via their plan website, participants should also be provided with information on how a guaranteed income solution can build up their retirement income over time and how they can increase that number by saving more. “We’ve found that people actually save more when they can see the relationship between their savings and projected retirement income,” said DeLong.

AB places a strong emphasis on DC participant communication to help ensure that employees understand and adopt investment solutions that help maximize their retirement security. In 2021, AB’s client SURS won a Pensions & Investments’ Eddy Award for its innovative, best-in-class investment education communications to DC plan participants.

SURS Wins Award for Communications Excellence: Eddy winners recognized for communications excellence | Pensions & Investments

VI

REGULATION AND COMPLIANCE

Legislators across the political spectrum continue to demonstrate strong support for retirement security for American workers. “Lawmakers have been able to pull off a bipartisan agreement twice within a couple of years, which is impressive. They recognize that this is an issue that needs attention and they want to see the impact,” said Stumacher. “Every new regulation and guideline is designed to get more people saving, give more people access and offer more income solutions because they know that’s the combination that will help participants improve retirement security.”

SECURE Act safe harbor         
The first SECURE Act of 2019 had taken a leap forward in its support of lifetime income solutions. It added a safe harbor provision that reduced the fiduciary risks for plan sponsors as it provided them with an explicit process to assess the financial strength and creditworthiness of an insurance company as an annuity provider.

Plan sponsors can work with a 3(38) investment manager, who can assume the fiduciary duty to select and monitor the insurance provider(s). “As part of their evaluation process, plan sponsors should ask providers about their ability to act in a 3(38) capacity to select and monitor insurance providers. Not all do,” said DeLong. “Another question to ask is whether they run competitive bids with multiple insurers for greater participant and plan outcomes.”

QDIA considerations         
Under the Pension Protection Act, passed in 2006, the requirements for a QDIA in a DC plan include investment diversification and liquidity. If the income solution is part of the QDIA, or default, it needs to meet the requirement for liquidity, which disqualifies some types of annuities.

For example, certain immediate and fixed annuities that provide guaranteed income are illiquid and do not allow participants access to principal. While a path to purchase them can be offered during the accumulation phase, once the participant retires and the annuities begin to provide income, they are transferred out of plan.

“In contrast, a GLWB structure provides growth potential, permits beneficiaries to keep the assets if a participant passes away early, allows participants to change their minds and can be built to provide fiduciary protections,” DeLong said, adding this flexibility and liquidity is a key reason that their clients have chosen AB’s Lifetime Income Strategy.

Read: Groom Law Group’s Guaranteeing a Secure Retirement — A Practical Guide for Selecting DC Plan Lifetime Income Options

Upcoming legislation         
“We’re closely watching the status of permitting the use of CITs in 403(b) plans,” said DeLong, which would give workers in non-profits and educational institutions access to these investment vehicles, which can also include guaranteed income solutions. In addition, she said, legislation has been proposed to advance the use of annuities in DC plans, including in the QDIA. “While none of this legislation has advanced to date and is unlikely to in an election year, we anticipate more proposals in Washington that support annuities given their ability to reduce longevity risk for participants,” she said.

VII

GLOSSARY

Auto-enrollment        
An automatic contribution arrangement that allows employers to enroll employees automatically into a retirement plan unless the employee elects not to participate by opting out. Typically contributions are from employees’ pre-tax wages.

Auto-escalation         
A DC plan feature that automatically increases participants’ contribution amount to the plan, usually annually, by a specified percentage until a predetermined maximum is reached.

Cash balance pension plan        
A type of defined benefit plan in which the employer credits a participant’s account, usually based on a percentage of salary, and contributions increase with age. Participants may receive a specific benefit at retirement, often a lifetime income annuity.

Core menu        
The list of stand-alone investment options offered in a DC plan, designed for participants who elect not to use the default option or QDIA and prefer to select their investments from other plan choices.

Deferred annuity        
An annuity that starts to pay income benefits at a future date, usually determined at the time of purchase. Payment may be activated when a participant reaches a certain age in retirement.

Defined benefit plan        
An employer-sponsored pension plan that provides a guaranteed payout, such as a lump sum or a lifetime annuity, for employees at retirement. Employers follow Employee Retirement Income Security Act of 1974, or ERISA, rules for contributions and payouts, based on salary, age and tenure of employees.

Defined contribution plan        
A retirement savings plan to which employees contribute an amount that is intended to fund their retirement. They include 401(k) plans offered by public companies; 403(b) plans by nonprofits and 457 plans by nonprofits and state and local government entities. Typically, plan contributions are tax deferred and the employer makes matching contributions.

Guaranteed lifetime withdrawal benefit        
An income insurance wrapper of a participant’s portfolio that provides retirees with a stream of guaranteed-income payments for life if the participant’s portfolio is depleted. A GLWB typically offers income-growth potential, often based on gains from investments in the underlying portfolio, and it typically permits withdrawals or complete liquidation of the underlying portfolio.

Immediate annuity        
An annuity that starts to pay income benefits soon after it is purchased, usually within six months of a participant’s retirement.

Inflation risk        
The possibility that the future value of an asset will be reduced by economic inflation, weakening its relative purchasing power.

Market risk        
The probability that an investor will experience losses from factors that affect investment performance in the financial markets.

Mortality risk        
The likelihood of an individual passing away at an age that is earlier than expected and before benefits are fully awarded. In addition, some annuities may end at death, precluding the possibility of transferring the benefits to survivors, resulting in investment loss.

Pension Protection Act         
A law signed in 2006 that expanded the provisions of the Employee Retirement Income Security Act of 1974, relating to accessibility and coverage of DC plans and auto-enrollment features.

Plan sponsor        
A corporation, nonprofit organization, government agency or other entity that provides a retirement plan to its employees and acts as the plan’s fiduciary.

Portability        
The ability of a DC plan participant to transfer a plan benefit or investment vehicle either from one plan to another or between different types of investment accounts.

Record keeper        
A DC plan administrator that maintains data and provides a platform for participants to access their retirement plan accounts, access investments, make elections and receive notices, planning advice and education.

Stable value        
A portfolio, usually made up of fixed-income investments, that is insured to protect against declines in yield and loss of capital and designed to pay a fixed amount.

VIII

Quiz

Test your knowledge of retirement income solutions based on the information provided in this Guide. It offers a brief recap of key topic areas covered.

IX

RESOURCES

Visit: AB Lifetime Income Solutions

Read: DC Plan Participants Want Lifetime Income…but Need Help

Read: As Workforce Sentiments Change, Retirement Income Needs Haven’t

Read: Painting a Fuller Picture: A Framework for Comparing Lifetime Income Solutions

Read: Leveling the Retirement Income Playing Field: A Comprehensive Framework for Evaluating Diverse Lifetime Income Options

Read: Apples and Oranges: Understanding Lifetime Income Options

Read: Lifetime Income Fees vs. Costs: Look Beneath the Tip of the Iceberg

Read: AB Lifetime Income Strategy: Unlocking Retirement Income

Read: AB Secure Income Portfolio Overview

Read: How Should DC Plans Deliver Lifetime Income to Typical Participants?

Read: Guaranteeing a Secure Retirement — A Practical Guide for Selecting DC Plan Lifetime Income Options