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.  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. 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.