Ever-Wealthier DC Plan Investors Say ‘Show Me the Income!’

Other findings show nearly all (94%) employees view guaranteed lifetime income as a good fit for them, while 84% believe that non-guaranteed monthly income withdrawals are a good option and 88% view favorably a split option between guaranteed lifetime income and non-guaranteed monthly withdrawals.

The Psychology of Income

While retirement investors like the concept of guaranteed income for life, the idea of “locking it in” and not being able to make any changes, access larger capital amounts if needed or control how the money would be invested were all commonly cited as key disadvantages.

A substantial majority of investors (80%) surveyed have a favorable view of auto-enrolling into a retirement income solution. Millennials share a more favorable view than baby boomers (83% vs. 75%), along with those with incomes less than $100,000 (83%).

“We found that employees want their employers to start the retirement income conversation – specifically on how to turn their DC plan savings into an income stream in retirement,” Jenkins says. “To ensure employees are not only prepared for retirement, but provided with income throughout, it is crucial that employers look at a range of tools and income solutions and consider early, more frequent educational support to help employees have a smooth transition.”

Takeaways for Wealth Managers

While the survey is nominally focused on retirement plan investors and employers, Jenkins says, the findings should also be of interest to wealth managers and other financial professionals not concentrating their business on DC plans, if only because of the rollover market implications.

“One more general finding that really struck us in the data and in the focus group conversations is the fact that people don’t really seem to care too much about the technical details of how these solutions or products work under the hood,” Jenkins says.

Of course, people want to understand the fees they are paying and to have a solid appreciation for the goals and features of the strategies in which they invest, but they also have significant faith and trust in financial professionals to help them identify the right opportunities. As such, living up to this trust is a great opportunity and a great obligation for fiduciary financial advisory professionals.

“We heard time and again that people want reliable income, but they also want flexibility and they want transparent costs,” Jenkins says. “The interest in flexibility is often tied to fears about unexpected medical costs during retirement. People are afraid of what an emergency could do to their outlook if they have too much money locked away.”

Jenkins says advisors will have to do a lot of educational work in the coming years to make sure their clients and prospects understand that annuity products are different from standard equity investments. They may include growth-oriented features, but there is also an insurance arrangement and a guarantee being put into place, and clients must understand that these protection features come with a premium.

“To us in the industry, it is obvious that if you want a guarantee on your income in the future you will need to pay that guarantee premium. However, as we saw in our focus groups, this understanding is not necessarily obvious to everyday investors,” Jenkins says. “Many people told us they didn’t understand why they would have to accept a marginally higher cost as a fair part of an income guarantee.”

To Jenkins, this is a “glass half empty and glass half full kind of thing.”

“We need more education so people can understand the tradeoffs of security versus liquidity a little bit better — to understand what they are actually getting for the fees they pay.”