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For decades, the defined contribution (DC) system has used behavioral finance and plan design to help 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.
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
Source: U.S. Census Bureau & the Centers for Disease Control and Prevention.
With little guidance on how to sustainably spend down their workplace nest eggs, many participants are now looking to their plan sponsors to help answer the question: “How do I make my money last?”
Some 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.1 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.
Academic research suggests that how you frame income solutions greatly impacts participant decision-making.2
- Protecting retirement spending: when income solutions are framed 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 participants reach appropriate retirement income decisions.
Target date funds: familiar, holistic, with the potential to help deliver 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 help deliver sustainable retirement income than target date funds. Consider the following:
| …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 can naturally lend itself to building up income over time, leading and offer 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.
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. They can be a part of the change and help employees feel confident about their financial futures.
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1 Paycheck or Pot of Gold StudySM: Making workplace retirement savings last, MetLife, April 2017.
2 Brown, J.R., Kling, J.R., Mullainathan, S., & Wrobel, M.V. Why Don’t People Choose Annuities? A Framing Explanation, Brookings Institution, March 31, 2018.
This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the global retirement landscape.
The opinions expressed herein are subject to change at any time due to changes in the market, the economic or regulatory environment or for other reasons. The material does not constitute investment, legal, tax or other advice and is not to be relied on in making an investment or other decision. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and / or its subsidiaries (together, “BlackRock”) to be reliable. No representation is made that this information is accurate or complete. Reliance upon information in this material is at the sole discretion of the reader.
None of the information constitutes a recommendation by BlackRock, or an offer to sell, or a solicitation of any offer to buy or sell any securities, product or service. The information is not intended to provide investment advice. BlackRock does not guarantee the suitability of potential value of any particular investment. The information contained herein may not be relied upon by you in evaluating the merits of investing in any investment.
Investing in target date funds involves risk, including possible loss of principal. The target date in the name of the funds is the approximate date when an investor plans to start withdrawing money. The blend of investments in each portfolio are determined by an asset allocation process that seeks to maximize assets based on an investor’s investment time horizon and tolerance for risk. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (less equity exposure) over time as investors move closer to the target date. The principal value of a fund is not guaranteed at any time, including at and after the target date.
Not FDIC Insured | May Lose Value | No Bank Guarantee
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