Bridging the (income) gap

Our 2022 retirement income study focused on plan sponsor and participant preferences for turning defined contribution (DC) savings into retirement income. We teamed with leading research firm Greenwald Research on an extensive study involving connecting with 100 plan sponsors and consultants and more than 1,000 participants (all working for large US organizations with at least 5,000 employees) through online surveys, in-depth interviews, and virtual focus groups­.

How much money will plan participants actually need at retirement and later in retirement? Whatever the income amount, it has to be enough to help provide for all possible scenarios throughout participants’ retirement and not cause them to run out of money along the way. We found that participants wanted a consistent, monthly income stream to reliably cover their baseline expenses (housing, food, transportation, etc.) with the flexibility to withdraw additional amounts to cover ad-hoc spending (travel, dining out, emergencies, etc.).

Participants saw the potential advantages of guaranteed lifetime income solutions and non-guaranteed monthly income withdrawal solutions and how incorporating one – or both – into their total income strategy could help them achieve their retirement goals.

Across the board, participants felt a guaranteed lifetime income solution offered the peace of mind that they wouldn’t run out of money and would provide a stable, predictable income stream that could cover their essential monthly expenses for life. Plus, participants recognized – and valued – that this solution may be less expensive through their DC plan versus what they would pay on their own in the retail market or through a financial professional. The convenience and ease of accessing it through their DC plan was also an important factor.

However, having to pay an annual cost was a concern of participants (91%), yet just three in 10 listed it as a significant deterrent. Also, three in 10 participants felt it was reasonable to pay a higher cost for the benefit of a guaranteed income for life, with 58% saying it was “possibly” reasonable. 

Participants also liked the idea of having access to monthly income withdrawals through their DC plan, especially the flexibility to change the regular monthly payments as their income needs changed over time or withdraw larger (or smaller) amounts on an ad-hoc basis. While much more flexible and easier to understand, the income withdrawal solution came with some concerns. Overall, participants cited the possibility of running out of money as their top disadvantage (92%).

To provide access to the income benefits participants want, plan sponsors can include guaranteed and non-guaranteed solutions. They can highlight how guaranteed lifetime income can help participants solve their biggest fear – running out of money – and how the plan negotiates lower fees on their behalf, resulting in potentially higher monthly income for them. Also, sponsors can showcase how monthly income withdrawals (non-guaranteed) give participants the flexibility to adjust.