Serving up retirement security A menu-based approach to retirement income

You and your colleagues are seated at a large table in a bustling restaurant. You are handed a menu, but it isn’t organized in any coherent way. The carrot cake is listed next to the swordfish and below that, you see burrata, lemonade, and vegan ice cream. More worrying still, you realize you are responsible for ordering on behalf of everyone at the table. You begin to wonder, “How hungry is everyone? Are some people vegan? Will people want dessert?” Feeling your blood pressure rise, you look around for help. One colleague reminds you he is gluten-free, one smiles encouragingly, noting that she’ll probably eat a little of whatever you order, and several people are on their phones.

This is what we imagine it feels like to be a plan sponsor evaluating retirement income solutions today. The breadth of what can be considered a “retirement income solution” makes comparing options—let alone choosing one – a daunting task. Further complicating this task is the fact that there is little to no useful categorization in the industry to help guide your search. This leads to clunky, confusing comparisons. For example, how are plan sponsors supposed to evaluate a managed account program relative to adding partial withdrawals? Faced with this seemingly insurmountable challenge, some plan sponsors do nothing. However, with more Americans turning 65 this year than ever before,¹ this can’t be the right solution.

In this paper, we’ll outline a path through the retirement income landscape – providing a way to organize the universe of products, logically categorize solutions and, as a result, create meaningful comparisons. Our goal is to provide a guide that will allow plan sponsors to easily identify and classify solutions into one of three categories, leading to apples-to-apples comparisons and providing a framework for plan sponsors to make decisions confidently.

Today’s retirement income landscape

Retirement income products can be multi-faceted and complex. To help narrow the parameters for evaluation, the industry has created frameworks to classify products based on features: guaranteed vs non-guaranteed, in-plan vs out-of-plan. Other frameworks take the approach of categorizing products by their most salient qualities: flexibility, portability, etc. While these approaches provide a little more information, they don’t create apples-to-apples comparisons. It feels a bit like organizing a restaurant menu by flavor profile, let’s say by salinity—it’s a good start, but it still places oysters next to salted caramel ice cream.

We believe these approaches to classification have skipped a step. For example, while it’s helpful to identify if solutions have a guarantee, how does a plan sponsor even know if their participants prefer guaranteed solutions over non-guaranteed solutions? How can you tell if liquidity or flexibility would be more valuable? These answers are determined by the participants themselves. Therefore, we believe the first step in classifying solutions is to focus on who the product is designed for, rather than what is included.

A potential challenge of this approach is that retirees are an incredibly heterogeneous group, with wide-ranging needs and financial profiles. Understanding the needs of all retirees in the Plan is an impossible task. Thankfully, the DC industry has already created a structure to segment DC populations into broad categories by participant type. Today, most DC plan investment menus are structured into tiers:

We can take this tried-and-true DC plan structure, and evolve it to include retirement income. We do this by viewing each tier through the lens of a retiree. Each participant tier values different features in a retirement income solution; as such, we can start to categorize each retirement income solution by the type of participant they best serve.

Let’s start with the “Do It For Me” participant, who wants an easy button for his saving and investing during his working years, and will likely use the QDIA (in the vast majority of cases, a target date fund² ). In retirement, this participant is looking for an easy way to spend down his current DC plan balance efficiently. He likely wants something easy and flexible, and because he doesn’t want to dig too much into the details, he prefers a solution that he is already familiar with, is low cost, and provides predictable income for the rest of his life. For this type of participant, a target date fund with a retirement income feature is a great solution.

Now let’s take the other extreme: a highly engaged, sophisticated retiree in the “Do It Myself” category. This type of participant is likely looking for something specific to complement the rest of her portfolio—for example, a specific annuity type with her preferred features included. She values a solution that can be entirely customized and is portable, because she is seeking a specific, bespoke solution.

Practical applications and benefits

Using this framework, plan sponsors are able to methodically move tier-by-tier, identify solutions designed for that participant segment, and meaningfully compare and contrast the options available. For example, if a plan sponsor was looking to provide a solution for the Do It For Me tier, they could start by examining QDIA solutions that include an income feature. Just as importantly, it helps identify what to exclude from the search for that particular tier (e.g. partial withdrawals wouldn’t satisfy Do It For Me participants), creating cleaner comparisons.

Overall, categorizing income solutions by who they serve provides several benefits to plan sponsors, enabling them to:

1. Quickly identify the specific features that are most valuable by participant segment,
2. Easily slot available solutions into tiers, creating meaningful apples-to-apples comparisons within each category, and
3. Cater to the unique needs of individuals in a scalable way. 

This last point is worth underscoring. A DC plan that adopts a retirement income solution within each participant tier (e.g., target date fund solution with an income feature, managed accounts, and an annuity rollover platform) is able to cater to the broad array of retirees without causing confusion. In fact, solutions in different categories don’t overlap or compete with one another—they often complete each other, as each serves a distinct population and their particular needs. Finally, this evolution of the DC menu can serve as a release valve for fiduciaries: instead of the mounting pressure of choosing one retirement income solution to serve every single retiree, plan sponsors can choose a few that complete and complement each other, creating a better experience for all participants.

Conclusion

A key first step in examining retirement income solutions involves comparison. Historically, this process of comparing and contrasting solutions has been an extremely difficult task for plan sponsors. However, we believe that categorizing products based on who the solution is designed for, rather than what features are included, can help identify comparable solutions and generate more meaningful evaluations. This approach also empowers plan sponsors to select multiple, complementary retirement income solutions – enabling plans to cater to more individuals in a scalable way. Our approach turns chaos into clarity: classifying the myriad of products available into an organized menu. Plan sponsors can now easily evaluate and select the right solution(s) for them within each category – confidently choosing an appetizer, entrée, and dessert, leaving their participants happy and satisfied.