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A Growing DC-Plan Focus: Retirement Income

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The Institutional Retirement Income Research Council (IRIRC) has launched a series of planned white papers with its first release, “A Call to Action.” The IRIRC, which is comprised of a dozen plan consultants and advisors who work directly with plan sponsors and their providers, notes that “according to the Center for Retirement Research, more than $2 trillion of 401(k) and IRA assets was lost during the one-year period ending October 9, 2008.

Consequently, urgency is building as the risk of retirees outliving their nest eggs continues to escalate due to insufficient savings, increased life expectancy and poor investment decisions.

The white paper highlights the range of risks workers face when they retire and find themselves responsible for creating an income from their retirement assets. Those risks include:

– Insufficient savings that will lead some to invest too aggressively and suffer investment losses they cannot sustain.

– Fear of loss that will cause some to over-invest in capital preservation funds and suffer income erosion due to inflation.

– Unrestricted access to their retirement savings that will tempt some to spend down their savings on large discretionary items.

– Increasing longevity that is not fully accounted for, causing them to spend down their savings too rapidly.

The study notes, “Each of these factors contributes to a heightened risk that retirees will outlive their assets, forcing many to subsist solely on their Social Security benefits.”

The white paper argues that it’s time for defined contribution (DC) plans to include retirement-income solutions for several reasons:

– In the current DC model, all risk and responsibility has shifted from employer to employee.

– It is becoming increasingly apparent that, left on their own, the majority of individuals will be unable to effectively manage their retirement savings to generate lifetime income.

– Recent research indicates that behavioral biases and poor financial literacy are going to hurt the average DC participant’s ability to make optimal choices in creating retirement wealth and generating retirement income.

– There are several advantages to both plan sponsors and plan participants in making retirement income options available with the DC plan.

– Taking action now and adding retirement income options to DC plans may preempt mandatory changes that could be made by the government.

Martha Spano, West-division practice leader for Watson Wyatt Investment Consulting Practice and an IRIRC co-chair, says the growing interest in income solutions is coming from two sources. “One, of course, is the demographics — the idea that we’re going to have 78 million baby boomers retiring over the next 10 to 15 years,” she says.

“They are now realizing, especially in this current market volatility, that they are not protected on the downside. They put all their money in equities, they’ve suffered this loss. How will they construct a drawdown on their account balances that will allow them to have a secure retirement and not outlive their assets?” explains Spano.

“The other area it’s coming from is that plan sponsors are starting to realize that participants don’t necessarily have the tools to construct the drawdown. Employers are starting to look at that and say maybe we need to do something,” she concludes.

The IRIRC’s “Call to Action” white paper is available online at:


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