By Randy Myers
Five-Dimensional Framework Sheds Insight on Solving Retirement Income Challenges
By Randy Myers
Few issues have challenged retirement plan sponsors over the past decade more than figuring out how to help plan participants turn their retirement savings into retirement income. Potential solutions have been introduced but none have been widely embraced.
To better understand what sponsors and participants are looking for, and how current and proposed income solutions might meet their needs, global investment management firm T. Rowe Price surveyed both groups. It also developed a five-dimensional framework for analyzing retirement income needs and solutions. Its research found that plan sponsors are increasingly interested in new solutions to the retirement income challenge and that plan participants are prepared to make tradeoffs to get solutions that meet their most pressing concerns. And, said Tony Luna, a portfolio manager and head of the Stable Value Asset Management Team at T. Rowe Price, the research suggests a role for stable value in delivering what plan sponsors and participants want.
Luna was joined by Christina Kellar, a vice president and multi-asset solutions strategist and portfolio manager in T. Rowe Price’s Multi-Asset Division, in presenting the research findings at the Stable Value Investment Association’s 2024 Fall Forum. Kellar represented research led by Jessica Sclafani, global retirement strategist at T. Rowe Price, and Berg Cui, senior quantitative analyst in the firm’s Multi-Asset Research Division[1].
T. Rowe Price surveyed 120 defined contribution plan sponsors with at least $100 million in plan assets in the fourth quarter of 2023 to better understand their preferences for retired participants. This research identified two key reasons motivating plan sponsors to provide retirement income solutions for their plan participants. First, their participant population is aging as 71 percent of the sponsors surveyed indicated that their participant population skews older than it did 10 years ago. Second, 69 percent of sponsors want more participants to keep their account balances in their employer-sponsored retirement plan after they retire. (Furthermore, 68 percent say they are beginning to see more retirees stay in plan). Making it easier for retirees to convert savings to income would make it easier to keep participants enrolled after they stop working.
Already, 32 percent of plan sponsors surveyed have updated the distribution options in their plans to allow more flexible access to savings, and nearly half have contacted their plan’s recordkeeper to discuss retirement income features, services and solutions, Kellar said. Sponsors also are exhibiting an appetite for new solutions. Twenty-nine percent have asked their plan providers to evolve or create new retirement income capabilities, and another 44 percent are considering asking their providers to do those things.
“We’ve seen a resurgence of (interest in) retirement income … and regulatory tailwinds have helped boost that theme back to the top of our radar,” Kellar said. “For some it might feel like déjà vu, but we’ll say that this time is indeed different, and plan sponsors are more and more open to evaluating retirement income solutions for their plan.”
Right now, the most common income solutions offered or under consideration by plan sponsors are, in order of popularity, stable value funds, a simple systematic withdrawal capability, and money market funds. When plan sponsors were asked which solutions they would find most appealing, the lineup was slightly different: a simple systematic withdrawal capability, an investment that incorporates a partial guarantee, stable value, and a target-date investment with an embedded annuity feature.
Luna noted that of the solutions listed above, stable value and target-date funds are both already widely offered in retirement savings plans. To better understand how those two products—and others—might best be used to meet the needs and goals of plan participants, T. Rowe Price developed a five-dimensional framework to evaluate and compare them. The firm also asked participants what they value in a retirement income solution.
The five-dimensional framework is built around what T. Rowe Price identified as the five key attributes of the “in-retirement experience” that most concern retirees. They are longevity risk, the level of payments received, the volatility of those payments, liquidity, and the chance of an unexpected depletion of their account balance (perhaps due to exposure to market risk).
In surveying individuals about their preferences, T. Rowe Price found that they prioritize guarding against longevity risk and an unexpected balance depletion more than the other factors, with volatility in the level of payments received their least pressing concern.
Kellar explained that those findings can help with analyzing how various income solutions might be used or combined to deliver what matters most to plan sponsors and participants, considering the tradeoffs inherent in each different solution. For example, an annuity may help mitigate longevity risk but reduces liquidity. A managed payout fund offers full liquidity but may introduce income volatility. A stable value fund might help with maintaining liquidity and limiting volatility but do less to manage longevity risk.
To help with developing retirement income solutions, T. Rowe Price’s research included an effort to quantify what participants would pay to prioritize the different factors in the five-dimensional framework assuming they couldn’t have everything they wanted in equal measure. For example, using a hypothetical in which the base case delivered $100,000 of annual income to age seventy-five, the analysis showed that people would forfeit $14,222 of income annually to achieve guaranteed income for life. To preserve liquidity for 100 percent of their account balance, they would give up $6,461 annually.
Luna stressed that T. Rowe Price’s research supports the idea that stable value could play an important role in meeting the retirement income needs of plan participants.
“We are working very closely with our multi-asset team in developing (income) solutions,” he said. “I feel comfortable sharing … (that) when you add an allocation of stable value it does exactly what we think it should in (our) models. It’s a non-correlated asset that reduces volatility without sacrificing much in returns.”
[1] Sclafani, Jessica. “Implementing an in-plan retirement income solution.” T. Rowe Price, May 2024. https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2024/q2/implementing-an-in-plan-retirement-income-solution.html
