Appeal of guaranteed lifetime income option grows among plan members

Invesco has released the findings of its 2022 Defined Contribution Retirement Income Study, which explores member preferences for generating retirement income and fiduciary considerations for plan sponsors when evaluating pension solutions. retirement income.

The “Show Me the Income” study looks at a few key areas, including how plan members view retirement income in general, what kind of in-plan solutions might be most appealing to them (and why ) and how best to bridge the gap between savings and income in the future by examining how the mindsets of plan members and plan sponsors sometimes differed.

According to the study, participants view retirement differently, driven by their unique personal experiences, goals and financial resources, with no clear patterns across generations, income levels or gender. Most plan members believe their defined contribution plan (83%) will be their primary source of retirement income, followed by Social Security (63%) and personal savings and investments (58%).

Even for those with traditional defined benefit plans, 79% said they expect their defined contribution plan to be their main source of retirement income, according to the study. This highlights the importance of DC plans for corporate and public sector employees.

Plan members expect to rely on defined contribution plans in retirement, but 68% say they were worried about running out of money – a fear felt even by those who work with a financial professional, with higher incomes or who have a defined benefit plan, the survey said. While 78% of plan sponsors said they provided communications, only 38% of plan members recalled receiving them.

As plan sponsors and advisors scramble to solve “the retirement income crisis,” many plan sponsors often don’t know how to proceed, the study says. Plan sponsors want more information and guidance from advisors and regulators about the fiduciary risk associated with guaranteed income products before adding new solutions to their plan menu.

The study found that participants want a consistent monthly income stream to reliably cover basic expenses, including housing, food, and transportation, with the flexibility to withdraw additional expenses for travel or emergencies. .

Given the choice, 90% of participants said they would allocate their DC savings to more than one retirement income option, according to the study. Overall, 94% said they want a guaranteed lifetime income solution that gives them stable, predictable income without running out of money. If having to arbitrate between a guaranteed or non-guaranteed flexible income solution (84%) allowing them to modify their monthly payments was less attractive, 88% prefer a balance between reliability and flexibility.

According to the study, participants were satisfied with guaranteed income options because they couldn’t run out of money even if their account balance was depleted (96%), it provides stable and predictable income that makes budgeting easier (95%) and it is cheaper through an employer than outside a plan (95%).

While participants like the idea of ​​guaranteed income options, many felt that drawbacks include a lack of control over monthly payments once they are set (92%), the annual cost (91%) and a lack of access to withdraw larger amounts if needed. (90%), according to the study. Even with these concerns, however, only three in 10 cited it as a major deterrent.

The appeal of a guaranteed lifetime income option is growing among plan members, and plan sponsors are starting to take notice. Among plan sponsors, 98% believe that offering a guaranteed solution would be a good choice for their members, according to the study. Many saw value in how it could help preserve plan assets by providing plan members with predictable income that is easier to access and less costly than what employees could obtain outside the plan.

Although a small percentage of plan members take advantage of it, 92% of plan sponsors agreed it was worth offering it, according to the study. However, sponsors viewed the added fiduciary risk to the plan, higher costs, and a participant’s inability to access larger amounts when needed as the main drawbacks.

Invesco partnered with Greenwald Research to conduct the research from March 2021 to April 2022. The study surveyed 100 online plan sponsors and over 1,000 plan participants (all working for large US organizations with 5,000 employees or more). There were 12 participant focus groups, nine interviews with consultants and plan advisors, and nine interviews with major plan sponsors.