Income reimagined:
expanding DC from saving to spending

BlackRock |Oct 14, 2019

The nastiest, hardest problem in finance.

— Nobel Laureate William Sharpe on the challenge of turning savings into retirement spending.1

For decades, the defined contribution system has used behavioral finance and plan design to make saving, investing and diversification as automatic as possible for participants. But when it comes to turning their savings into retirement spending, they are often left on their own.

And 62% say that it worries them.2

Paying for retirement is only going to get harder

While urgency has grown over the last decade to provide sustainable retirement income solutions within DC plans, demographic trends have also made retirement more expensive to fund. Longer lives translate to more years in retirement.

People are living longer in retirement

Increased life expectancy in comparison with the traditional retirement age at 65


Source: U.S. Census Bureau, November 2018.

With little guidance on how to sustainably spend down their workplace nest eggs, many employees are now looking to their employers to help answer the question: “How do I make my money last?”

8 in 10 participants would like secure income options in their workplace retirement savings plan


Source: BlackRock 2019 DC Pulse Survey.

Plan sponsors, providers and legislators are showing growing interest in providing guaranteed or income annuity options within DC plans. But so far no consensus approach has emerged, and despite the rational case that can be made for lifetime income solutions, a number of participant biases and behavioral financial barriers need to be overcome to drive adoption.

Reframe the outcome:
Income is not enough

Survey data shows that participants are interested in income solutions, but modest uptake suggests they are not. Yet when they do choose income, the surveys suggest that they are more satisfied than those who try to manage retirement spending on their own.

MetLife study on retirement income


Source: Paycheck or Pot of Gold StudySM: Making workplace retirement savings last, MetLife, April 2017.

Academic research suggests that how you frame income solutions greatly impacts participant decision-making:

  • Protecting retirement spending: when income solutions are framed as a way to protect their ability to spend over time, participants see it as a rational decision.
  • Annuity investment “return”: if participants focus on the “risk” that they will not collect enough income payments in return for the purchase price, they may think of income as a bad “investment.”

We believe that framing income as smart decision to protect retirement spending can be the first step to overcoming a range of biases and behavioral barriers. And by embedding income into the default option, DC plans can take advantage of one of the most powerful plan design features to help nudge participants into appropriate retirement income decisions. 

Designing solutions to overcome barriers to income


Why participants resist income:How to nudge them beyond the barrier:
It’s too complex: Embedding sustainable income into a default solution can reduce confusion about types of income and timing of the conversion.
Don’t like losing liquidity: A structure that allows for automatic, partial annuitization may preserve liquidity while providing a foundation of sustainable income.
Afraid of missing out on investment return: Consistently communicating to participants in terms of their projected retirement income can help normalize the idea of an income stream at retirement as the objective.

Target date funds: familiar, holistic, and ideal for income

Navigating today’s challenges requires reimagining what’s possible. It also means reframing what’s already in place to meet new objectives.

There may be no more powerful tool to deliver sustainable income than target date funds. Consider the following:

Target date funds

…are already in place on most plans and capture the majority of contributions. …are widely understood by participants and already frame their planning around the target date.
…have a structure that naturally lends itself to building up income over time, leading to partial annuitization at the target date. …may offer a growing stream of retirement income that feels like a natural extension of the lifecycle management they provide.

New technology can also help expand the potential of target date funds by engaging participants at every step along their career path and by giving them insight and clear visibility towards meeting their retirement goals.

Critically, target date funds offer a single framework for managing savings and investing, helping participants target and support a desired retirement spending level.

9 in 10 participants find a guaranteed retirement income stream appealing


Source: BlackRock 2019 DC Pulse Survey.

Retirement Reimagined

Retirement income must be part of DC’s next evolution. Fortunately, many of the plan design tools and best practices used by today’s highly evolved DC system can help drive adoption of lifetime income solutions by giving participants a sense of ownership of their growing income stream.

Employers play a key role in empowering every American to build a more secure retirement. By partnering with BlackRock, you can be a part of the change and help employees feel confident about their financial futures.

Download the whitepaper