The combination of a prolonged economic crisis, market volatility, low interest rate environment and increased dependency on defined contribution plans to provide retirement benefits has fostered an environment where guaranteed income, downside market protection and enhanced retirement readiness tools are increasingly essential offerings for retirement plan providers. In-plan guarantees provide a compelling reason for consumers to consider options available in their employer-sponsored plans that offer financial protection coupled with growth potential. 

Insurance companies are uniquely proficient in managing risk and are now leveraging their expertise with these types of guarantees and turning them into viable and desirable solutions in the retirement plan landscape. Guaranteed withdrawal benefits, lifetime income options and principal protection strategies will command more attention as sponsors and participants look to these solutions to help meet retirement planning goals and to solve for some of the shortfalls of the defined contribution industry.

A Look Back

The defined contribution industry has made significant changes over the last 20 years regarding the investments offered in employer-sponsored retirement plans and allocation strategies to plan participants.  In the 1990s, the focus on investment education and participant choice did not lead to appropriate asset allocation as participants either chased returns after a market rise or abandoned their asset allocations after a market decline. Through the late 1990s and early 2000s, participants were introduced to target date funds. These funds were introduced to participants with a “set it and forget it” approach and a guaranteed way to get to retirement. As a result, these funds became the primary investment option for many participants.

After the economic crisis in 2008, many participants were reminded that nothing is certain when planning for retirement as some 2010 target date funds lost more than 30 percent of their value, causing baby boomers to delay and redefine their retirement. [1] Because of this, retirement plan providers and fund companies focused on different glide paths of target date funds and “to” versus “through” strategies as a way to help alleviate the steep losses near-retirees may suffer and enable the plan sponsors to better protect their participants from the next economic downturn. 

A “through” strategy has a higher equity exposure at retirement with a continuation of the glide path through retirement while a “to” strategy has a lower equity exposure at retirement with a static asset allocation during retirement. The higher equity strategy of a through strategy has an increased chance of steeper losses based on the volatility of the equity markets.  Providers also began offering custom target date funds that included alternative asset classes as a way to infuse additional diversification into the fund to mute volatility and losses.  

What’s on the Horizon

The next phase of income solutions has providers expanding their target date options to include in-plan income benefits and guarantees that offer participants a guaranteed income benefit at retirement. In early 2012, the Department of Labor and Treasury provided guidance to improve security through the promotion of longevity insurance and annuities in retirement plans[2].  Additional, favorable guidance will likely be issued, paving the way for innovative product development and adoption of guaranteed income solutions within 401(k) and other defined contribution plans.  Guaranteed Withdrawal Benefits and Lifetime income options

Guaranteed Withdrawal Benefits (GWB) can guarantee a stream of income while protecting participants in a down market just prior to, or shortly after, they retire. Most GWBs enable a participant to receive a guaranteed stream of income in retirement while also providing access to assets for emergency withdrawals. Now these types of guarantees are being integrated into target date funds that have asset allocation strategies.

The GWBs can help protect participants from an economic downturn and provide a guarantee to generate the same level of income despite any potential loss in market value. The industry is currently examining innovations in automatic solutions that would auto-invest into these types of funds. With these innovations comes a greater need for participant communication and education around guaranteed income streams and retirement security to help participants understand the benefits these products provide.

Lifetime income solutions offer participants both flexibility and a lifetime guarantee. When used with a target date fund and automatic features, in-plan guarantees avail participants of a steady income stream while in retirement. Lifetime income options retain market exposure and provide a growth potential with a hedge against inflation while also protecting participants against a downturn in the market. 

Future of In-Plan Guarantees

The future of in-plan guaranteed solutions will not happen overnight.  There are several factors that advisors and consultants need to address before considering these solutions for plan sponsors including portability, liquidity and insurer risk. An important factor employers offering these solutions need to consider is the level of fiduciary responsibility and integration that is required between lifetime income solutions and the accumulation process. A critical factor for success is education for advisors, plan sponsors and for participants to help them understand the value of these solutions. 

Providers in the industry are up to the challenge and continue to provide innovative solutions that can help participants with retirement readiness. Now more than ever, defined contribution plans are poised to deliver solutions to sponsors and participants. The income security that in-plan guaranteed products provide enables participants to approach their retirement years with confidence and optimism. 

These same guarantees appeal to sponsors as they promote and complement the very reasons employers agree to sponsor retirement plans: Namely, the plans foster the attraction and retention of a talented workforce while facilitating the transition of their human resources into retirement as their workforce ages.   

Advisors and brokers should work with providers that offer guaranteed income solutions within their employer-sponsored retirement plan programs. Advisors and plan sponsors that take advantage of these tools will generally have better retirement outcomes for their participants.  


[1] Target-Date Series Research Paper: 2009 Industry Survey, Morningstar.

[2] On February 2, 2012, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released proposed regulations and a new Revenue Ruling relating to the purchase of longevity annuities (sometimes referred to as “longevity insurance” or a “deeply deferred annuity”) inside defined contribution retirement plans and individual retirement accounts (IRAs).