Participants don’t all think and behave the same way, but new frameworks can help DC plans better understand the needs of savers and inform solutions that will benefit the individual styles of more and more people.
When it comes to retirement income preferences of savers, a majority (71%) categorize into Total Return or Income Protection styles. Those who identify with a Total Return style look to draw income from a diverse investment portfolio rather than using contractual sources (such as annuities), relying on portfolio growth to support spending in retirement. The Income Protection style describes investors who think safety-first, preferring contractually protected lifetime income to cover essential expenses and using a more diversified total return portfolio for discretionary expenses. This is among the key findings of a survey of 2,023 retirement savers conducted by RISA (Retirement Income Style Awareness) and BlackRock during the summer of 2022.
RISA employs a framework that identifies a collection of retirement income preferences that translate into retirement income styles – or how retirees prefer to source spending in retirement. Total Return and Income Protection are two of the four styles in the framework. Further detail on the framework can be found here.
The breakdown across the four retirement income styles was consistent with prior RISA studies, demonstrating individuals’ preferences tend to stay consistent over their lifetimes and are not materially impacted by the market environment.
Overall, the study revealed the complex nature of solving for the diverse styles of DC participants and underscores the importance of investment solutions that can be more broadly applicable to more retirement income styles, or how retirees prefer to source spending in retirement.
In addition, the study highlighted the importance of engagement, education, and spending guidance in matching strategies with the preferences of different savers – and the opportunity for the DC industry to do more in providing individuals with further spending guidance.
Solutions that combine investments and insurance for DC plans
Current DC plan design tends to prioritize investment options that emphasize asset accumulation and growth, which correlate highly to the Total Return style of retirement savers. However, looking through a retirement income lens, that leaves a substantial majority of savers (approximately 2/3) without a preferable investment option. Addressing participant heterogeneity, and considering how to shift DC plans from an accumulation focus towards a design that also addresses decumulation, will have to involve investment solutions that appeal to various types of preferences.
One area tested in the study was the attractiveness of a retirement income solution that combines elements of investments and insurance as the default option in a DC plan – allocating a portion of the overall asset allocation into a lifetime income-like asset class.
Among savers of all ages, 84% of respondents found this type of solution appealing if it was offered in their DC plan.
When respondents from all ages were asked about how they would allocate across equity, fixed income and lifetime income, the average allocation to lifetime income was 36%, consistent with prior RISA and other academic studies.
Respondents who favor a combined solution tilt toward being safety-first investors. Similarly, this type of solution was of greater interest to those who identify less strongly with a specific retirement style, but instead demonstrated preferences for multiple retirement income styles.
Detail on retirement concerns
The study also reveals that 37% of respondents are moderately or extremely concerned about outliving their savings if retirement lasts longer than expected, with another 22% somewhat concerned. Those with fewer financial assets and lower financial literacy reflect a greater concern around longevity.
Savers also revealed worries around having enough liquid assets to cover unexpected health care expenses, such as a high medical bill or a need to move into a nursing home – with 45% of respondents moderately or extremely concerned about paying for unexpected healthcare expenses, and another 28% somewhat concerned.
Inflation remains top of mind, and the worry is that high inflation will make it hard to sustain retirement spending given the rising cost of living. The study found 51% of respondents are extremely or moderately concerned about the effects of inflation, with another 30% somewhat concerned, making inflation the retirement concern worrying the largest number of survey respondents
Overall, the study’s findings identify areas for further opportunity in addressing the preferences of DC plan participants.
Download the full findings report
