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Retirement Planning > Retirement Investing > Income Investing

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

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What You Need to Know

  • Despite substantial product innovation, workplace retirement plan investors still feel a lack of support from advisors and asset managers with respect to income planning.
  • DC plan investors hold substantial wealth that feeds into the rollover market, meaning wealth managers are likely to be impacted by big ‘in-plan’ annuity trends.
  • Despite their challenges, investors voice significant faith in financial professionals to help them identify the right income opportunities.

Invesco has published its annual analysis of the U.S. defined contribution retirement planning system, giving this year’s report the telling title: “Show Me the Income.”

The research stands out for blending both a qualitative and quantitative approach, synthesizing surveys of large groups of plan participants and plan sponsors with focus group work and in-depth interviews with plan consultants and financial advisors.

Speaking with ThinkAdvisor about the results of the 2022 analysis, Greg Jenkins, Invesco’s head of institutional defined contribution, emphasized the lack of confidence many retirement-focused investors are feeling today. Their concerns, he explains, stem only in part from the current market volatility and fears about an impending recession.

Simply put, many Americans with sizable and growing retirement plan balances feel well served overall by their employers and the DC plans they offer, but they also feel an acute lack of support in key areas, especially with respect to retirement income planning. DC plan investors, a sizable proportion of whom represent future wealth management clients, also want help understanding the current moment in the markets and what their own unique financial future holds in store.

The Income Question Remaking DC Plans

The survey results reveal that most employees are relying on 401(k) savings to be their largest source of retirement income — surpassing Social Security, personal savings and other investments, Jenkins says. However, only a small portion of those employees are confident in their ability to generate a retirement income strategy on their own.

The survey results show that almost 70% of employee respondents are worried about running out of money in retirement. Jenkins says this stat shows how vital it is that employers, retirement plan service providers and the advisory community collaborate to help them confront and overcome that fear.

“We have to help them bridge the gap with retirement income options and education,” Jenkins says.

The report’s publication, with its emphasis on income planning topics, comes at a time when the broader DC plan industry is taking steps to deliver more annuity-style income insurance products. For example, Fidelity, the biggest DC plan recordkeeper, is developing an annuity platform for 401(k) assets that is expected to launch in 2023, and other major recordkeepers are expected to follow suit.

In such an environment, advisors foresee more qualified money staying “in-plan” as recordkeepers provide greater access to institutionally priced annuities, potentially impacting the pace of rollovers in turn. Sources say wealth managers must step up their income planning capabilities to meet the emerging competitive pressures.

Data Highlights Income Interest

Invesco’s survey suggests nearly nine in 10 employees would be more likely to stay in their plan if it were able to generate a regular income stream in retirement. At the same time, almost a third of participants were unaware that staying in the plan after retirement was even possible today, highlighting the need for improved communication.

As Jenkins points out, nearly all (97%) employees would view their employer favorably if they added investment options to help generate retirement income. While 78% of employers surveyed say they have provided communications and/or education about turning retirement savings into a regular stream of income, only 38% of employees remembered receiving these types of communications.

Jenkins says this is a common problem in the DC plan world, with investors overlooking options that are already available to them and employers failing to appreciate the tantamount importance of strong communications and benefits education.

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.”


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