By using only part of the balance to purchase a deferred annuity, this solution combines the lifetime income guarantee of a DB plan with the flexibility of a DC plan. In addition, participants know how long their drawdown assets must last, and can budget with more certainty than they could with traditional DC plans. By insuring against the risk of “living too long,” the participant is able to draw down the remaining assets faster, resulting in higher income in retirement.
Advantages for Participants and Plan Sponsors
While DB plans comprehensively solve the lifetime income challenge for participants, the costs and risks to sponsors are leading to their decline. Our proposed lifetime income solution solves for many of the challenges typically related to retirement income solutions, such as liquidity, cost and fiduciary risk.
Plan sponsors are uniquely placed to use their institutional knowledge to educate participants on the benefits of annuities and to use their institutional buying power to help participants obtain cost-effective longevity insurance.
Moreover, extending the default to encompass the retirement phase can be beneficial for both participants and plan sponsors. Participants benefit because they get access to a sophisticated solution at an institutional price for the retirement phase, and plans can retain greater scale by keeping the assets during retirement.
Before we are able to introduce this solution broadly to plans and participants, several implementation issues need to be addressed:
- Establishing connectivity between recordkeepers and insurers for the annuity purchase
- Expanding the number of deferred annuity providers
- Addressing fiduciary concerns for plan sponsors
Tackling these challenges will require collaboration from many different industry stakeholders, including plan sponsors, asset managers, recordkeepers and insurers. Policymakers also have a critical role to play.
In order to build the necessary collective momentum, State Street maintains ongoing conversations with Fortune 100 employers who share an interest in advancing the adoption of income solutions in workplace savings plans. The Regents of the University of California continues to participate actively in this group dialogue.