Income solutions remain sticking point for retirement plan sponsors, survey shows

The booming retirement income market seems to be befuddling defined-contribution plan sponsors.

According the recently released NEPC Defined Contribution Plan Trends and Fee Survey, there's almost no industry consensus on how to create meaningful retirement income solutions in employer plans even as the market for those solutions has skyrocketed. In fact, the report revealed that choosing a retirement income solution has proven to be a major pain point for many defined-contribution clients.

The investment consultant and OCIO provider’s data showed that 84% of plan sponsors who responded to the survey currently offer their participants a retirement income solution, generally in the form of a target-date fund that includes the flexibility to take installment withdrawals in retirement. Currently, an overwhelming 96% of respondents offer TDFs, which is unchanged from 2020, with 46% of total plan assets invested in TDFs, up from 42% in 2020, according to the study.

Respondents to the NEPC survey included 119 clients representing $283 billion in aggregate assets and 2.2 million plan participants.

“As participants continue to demand retirement income solutions, plan sponsors are seeking trusted stewards to help them simplify what’s become a pretty complex evaluation and selection process,” Alison Lonstein, principal and senior consultant on NEPC’s defined contribution team, said in a statement.

Lonstein added that this trend mirrors the action in other segments of the retirement space, especially in the ESG and legal environments, where she's seen a “significant uptick in clients asking for fiduciary training on the ESG landscape and requests for more insight and intel around legal news.”

The concept of using retirement plans to generate income during retirement years isn't new, but interest in the topic has increased given the market volatility in recent years. There's also growing anxiety that higher-than-expected living costs will deplete retirement savings.

“For workers near retirement age, it's tough to pivot into income-generating investments such as dividend-paying stocks to close the gap quickly," said David Scranton, CEO and founder of Sound Income Group. "For younger generations, they want reassurance there are solutions in their defined contribution plans to avoid a similar situation when they retire. I believe we'll continue to see interest in income-generating investments whether through ETFs and even TDFs."

Ron Surz, president of Target Date Solutions, contends that there is a meaningful retirement income solution, but that most TDFs cannot provide it because they are “high risk” at the target date, being approximately 85% risky with 55% equities and 30% long-term bonds.

“The solution is my patented U-shaped glide path that is only 30% risky at the target date and then re-risks in retirement up to about 50% risky for an 85-year-old,” Surz said, adding that his U-shaped solution has been endorsed by members of the The American College of Financial Services.

Another key trend highlighted in NEPC’s survey is the increased adoption of passive tier options in plans. The report showed 83% of plans currently offer a passive tier with three or more index funds, an increase from just 66% in 2020.