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The Stars are Aligning for Guaranteed Income in Retirement Plans

Bolstered by public policy, an improving interest rate environment and growing examples of successful implementation, plan sponsors have begun to seriously consider ways to offer in-plan guaranteed income to their participants.

Investment Strategist

We believe now is the right time to engage in conversations around retirement income solutions, drawing on progress made by the asset management, recordkeeper and plan sponsor communities in addressing the many hurdles that come with innovative change. State Street offers unique insights in this regard – having deep experience working with the many stakeholders necessary to successfully implement a solution. While income conversations have been a focus for the better part of a decade, a few key developments have caused momentum to accelerate.

Public Policy Support

Throughout the history of Defined Contribution plans, public policy progress has served as a key catalyst in promoting change and improving participant outcomes. Most recently, multiple iterations of the SECURE Act took great measures to help broaden savings plan options and inclusivity, allowing more Americans to participate in workplace plans and empowering greater retirement readiness. Both pieces of legislation placed particular emphasis on lifetime income, clearing roadblocks in front of guaranteed income solutions and providing plan sponsors with crucial support.

SECURE 1.0 (2019) SECURE 2.0 (2022)

Modifying the Fiduciary Safe Harbor for Selecting an Annuity Provider

This provision helps to relieve the fiduciary liability of plan sponsors in conducting insurer due diligence and enables a more streamlined process to lifetime income option evaluation.


Enabling Portability of Lifetime Income Products

Facilitates portability of lifetime income products held in retirement plans.


Featuring Lifetime Income Disclosure

Requires that a lifetime income disclosure benefit statement be provided annually to defined contribution plan participants -- intended to provide participants with a projection of what they could expect to receive monthly during retirement. 

Limits Raised for Qualified Longevity Annuity Contracts (QLACs)

QLACs are deferred annuities that begin payment at or near the end of life expectancy. The QLAC regulations previously limited the premiums an individual can pay for a QLAC to the lesser of $155,000 and 25% of the individual’s account balance under the plan or IRA.

  • SECURE 2.0 repeals the 25% limit
  • SECURE 2.0 raises the $155,000 limit (2023) to $200,000.


Free Look Period for Annuitants

Generally, QLACs are prohibited from having any cash surrender value or similar right. SECURE 2.0 clarifies that this prohibition does not apply to free-look periods, up to 90 days. 


An Improved Rate Environment

2022 was a difficult year for markets and particularly difficult for retirees. A diversified portfolio of stocks and bonds delivered its worst return in 100 years while soaring inflation further compromised purchasing power.

Maybe the only silver lining of this environment has been a substantial improvement in interest rates, causing a transformative impact on the level of retirement income that participants can access. For example, the level of monthly income from a deferred annuity (e.g. QLAC) purchased at age 65 and beginning payments at age 78 has improved by 95% over the last two years, on average.1

The previously noted increase in the regulatory cap on contributions to QLACs has further improved the income picture for those who elect them. Today, a 65-year-old participant who purchases $200,000 in QLAC income with pre-selected features would be expected to receive $31,176 per year beginning at age 78. Adjusting for the rates and limits in place in 2021 (a $145,000 limit with roughly 65% lower monthly income quotes), this individual would have received only $13,694.2

Innovation in Product Design

With rapid change comes great opportunity, but also a need for prudence and due diligence. What are some of the key areas of evaluation for plan sponsors seriously considering retirement income solutions?

1. The Right Glidepath

Building guaranteed income off of the established and highly successful framework of Target Retirement strategies may be the most effective means to drive participation and adequate accumulation. Focus on cost and transparency has led to significant asset flows into low-cost, index based solutions in recent years. However significant differences exist in diversification, risk management, and long-term track records between index-based providers.

Choosing a partner that offers a best in class glidepath with a commitment to partnering on future innovation is a crucial first step.

2. Efficiency in Accumulation & Decumulation

While managed payout strategies can be a helpful tool in efficiently drawing down assets, they don’t address longevity risk -- which increases in importance as retirees age -- as explicitly as solutions incorporating guarantees.

Immediate annuities provide some longevity protection but extending that protection into early retirement comes at a real cost in terms of income. Deferring income until later in life dramatically increases the income for the same premium amount. For example, $100,000 allocated to an immediate annuity would generate monthly income of around $600 whereas a deferred income option that starts payments at age 78 would generate around $1,800 in monthly income; 3 times larger than an immediate annuity. Larger payout later in life provides greater financial insurance when individuals are more likely to experience a financial emergency and less able to reenter the workforce as a way to increase income.

3. Flexibility Where Participants Want it

Maintaining flexibility is a key consideration for plan participants, allowing for discretionary spending in early retirement. Pairing this flexibility with managed drawdown guidance on non-guaranteed assets may help optimize spending until meaningful longevity protection comes in later in life via the QLAC.

4. An Improved Participant Experience

Any successful income solution must be designed with participants and plan sponsors in mind. Without proper engagement and understanding, even the most efficient solutions will fall flat. Robust communications, an intuitive microsite for elections, and structured choice to limit complexity are all necessary features.

Taking the Next Step

Plan sponsors take significant measures to evaluate plan defaults to ensure that they best positioned to maximize outcomes on behalf of participants. We believe that now is the time to take similar measures related to Retirement Income. Supportive policy guidance, an improving rate environment, and the emergence of a range of solutions have brought Retirement Income from concept to reality. However, just as with Target Date strategies, the details matter, and crucial differences in approach and implementation can make a meaningful difference on the level of retirement readiness that these solutions can deliver.

What Is IncomeWise?

IncomeWise is a next-generation Target Retirement strategy that pairs the accumulation benefits of Target Date funds with a deferred annuity to address longevity risk. Participants during their working years are invested in a passive TDF using strategic asset allocation and 100% index funds. To partially hedge some of the interest rate risk tied to a potential annuity purchase, the vintages nearing retirement include an allocation to longer duration bonds which grows to about 10% of the overall portfolio at retirement.

Phase 2 is early retirement. Between the ages of 62 and 69, participants have the option to purchase deferred guaranteed income. If a participant chooses to use a portion of their savings to purchase guaranteed income, those assets leave the plan and the participant has a contract between themselves and the insurance company that State Street selected for that year’s annuitization. These participants also have access to Immediate Income in the form of a monthly paycheck from their remaining liquid assets, following a sustainable drawdown rate generated by State Street.

In the 3rd and final phase, deferred guaranteed income commences at age 78 and continues for life.

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