Navigating the spectrum of retirement income solutions for DC plans

With the continued shift from Defined Benefit to Defined Contribution (DC), longer life expectancies, and unpredictable market returns, people have never been so challenged with determining how to spend down their accumulated retirement savings. A range of new solutions are emerging to help answer those needs.

According to BlackRock’s 2024 Read on Retirement® survey, 62% of participants say it's difficult to know how their retirement savings will translate into monthly retirement income. This is understandable, given that every retirement experience looks different: some people plan to live off their investments, others like and want to work, and still others need a bridge until they collect Social Security.

These factors and others, like talent acquisition and retention, are driving more plan sponsor interest in tools and investment solutions for decumulation and retirement income. 99% of plan sponsors feel responsible for helping participants generate and/or manage their income in retirement, according to the Read on Retirement® survey. At the same time, sponsors are working to understand the rapidly changing landscape and their own needs for retirement income, recognizing that their decisions can have a big impact on participant outcomes.

As we see it, the range of options covers solutions such as yield-oriented investments, multi-asset funds coupled with spending strategies, managed payout investments, multi-asset funds with embedded income streams, and standalone insurance options.

To help sponsors evaluate these options, BlackRock laid out three principles for decumulation strategies in a paper in early 2021. Namely, we believe any sound retirement spending strategy should aim to achieve the following objectives:

• Maximize spending
• Minimize spending volatility
• Address longevity risk

For plans looking to add retirement income, understanding how these solutions consider the three principles and make trade-offs is critical. In addition, plan specific considerations like objectives, behavior, demographics, and structure are important alongside structural needs when using a solution with a DC plan.

When looking at solutions, BlackRock believes the most effective option will generally meet four criteria:

1) Use what participants know: Integration through the target date fund or other existing plan investment options can make it simple for participants to access retirement income.

2) Solve for the retirement ecosystem: Plan solutions need to work with the plan structure and regulatory considerations by being cost-effective, liquid and easy for recordkeepers to process.

3) Build through a fiduciary lens: Solutions should be built using a thoughtful investment process. In addition, we believe they should offer participants flexibility.

4) Be simple for participants: Participants need to be able to use and understand how the solution can drive their retirement income.

Our paper, “Navigating the spectrum of retirement income solutions for defined contribution plans” offers a summary and evaluation of the offerings that we see in the U.S.

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