Products & Services April 10, 2025

Understanding and Evaluating Retirement Income Solutions

With retirement income products increasing in popularity, plan fiduciaries must select appropriate options to offer to workers from a growing array of solutions.
Reported by

With nearly 4.2 million Americans reaching age 65 this year—the most ever—retirement plan advisers and sponsors are no longer able to ignore or put off the need to provide retiree and near-retiree participants with options to begin drawing down the income they have spent decades saving.

Last year, about 20% of 500 C-suite leaders surveyed by TIAA said that offering guaranteed income for life was the top way that employers could improve workers’ retirement. But plan sponsors have an additional incentive to provide such solutions: Doing so makes it easier for them to retain retired participant assets and maintain their scale. Amid market turmoil, some plan sponsors are also turning to annuities as a potential replacement for bond funds in the fixed-income portion of portfolios.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

“Retirement income is complex, and plan sponsors can benefit from a trusted partner to help them sort through all of the products coming to market,” says Jessica Sclafani, a global retirement strategist at T. Rowe Price. “We are seeing plan sponsors that don’t work with a consultant or adviser on retainer are considering engaging one for a retirement income project.”

Since the Setting Every Community Up for Retirement Enhancement Act passed in 2019, giving plan sponsors safe harbor to offer in-plan annuities, plan sponsors have been slowly adopting such products, which typically carry lower fees than out-of-plan options.

“I expect we’re probably only a few years out from all recordkeepers having at least one, if not a few, lifetime income solutions available,” says Phil Maffei, TIAA’s head of corporate retirement strategic partnerships and sales enablement.

Array of Products

Plan sponsors are not the only ones focused on guaranteed income. As market volatility and higher inflation have contributed to worsening retirement outcomes, more participants are also looking for access to retirement income solutions, says Nick Nefouse, BlackRock’s head of retirement solutions and the global head of LifePath.

The growing interest from both plan sponsors and participants has led to an ever-growing array of income solution products from which to choose. As with any plan design change, that requires due diligence.

“Plan sponsors should consider the investment outcome, ease of implementation, cost-effectiveness and participant education when integrating retirement income solutions,” Nefouse says. “Ensuring that the solution aligns with the plan’s overall investment strategy and provides clear communication about the benefits and options available is crucial.”

Sclafani says it is important for plan sponsors to consider the trade-offs that come with any retirement income solution.

“For example, if the product offers a guaranteed income component, what does that mean for liquidity or the participant’s access to their savings?” she says. “Alternatively, what are the fees associated with offering a guarantee? None of these characteristics are inherently good or bad, but it’s about understanding what the product is giving up on to be able to offer something else.”

Bringing annuities into plans allows plan sponsors and their advisers to create tailored communication and education content to help participants understand the product. In addition to providing stand-alone annuities in their investment lineup, recordkeepers and other providers have been leaning into target-date funds with embedded annuities to deliver income to participants through a vehicle with which they are already familiar.

Since launching in April, BlackRock’s LifePath Paycheck has grown to $16 billion in assets under management, as of the end of last year. Meanwhile, TIAA and Nuveen’s target-date lifetime income strategies recently surpassed 1 million accounts and had $50 billion in assets at the end of 2024.

Introducing RILAs

In March, researchers at the Pension Research Council at the Wharton School of the University of Pennsylvania published a paper sharing another option for plan sponsors to consider: embedding registered index-linked annuities into target-date funds. The paper suggested that RILAs, which are linked to equity indexes and which offer partial downside protection with an upside cap, might be cheaper to managed than TDFs and deliver higher risk-adjusted value.

“That’s a very viable structure,” says Frank O’Connor, the Insured Retirement Institute’s vice president of research. “It makes a lot of sense, and it’s a fire-and-forget type of thing for the participants.”

Annuities are not the only option for plan sponsors looking to offer income solutions to their participants; others include managed payout funds and systematic withdrawals. While these do not offer the same guarantee as annuities, they give participants greater control over their assets.

The best solution for each employer will depend largely on the demographics of its plan participants. For example, defaulting participants into annuities might not be the optimal route for plan sponsors whose participants have mostly low balances in their 401(k) accounts or for plans with primarily younger participants or a transient workforce.

Non-Guaranteed Options

Some plan sponsors simply are not sold on the complexity of or costs associated with some guaranteed income products. Such sponsors may instead be focused on nonguaranteed solutions, particularly as a default, and then planning to revisit guaranteed solutions in future years, says Jeremy Stempien, a portfolio manager and strategist at PGIM DC Solutions.

“We think that guaranteed income probably makes the most sense in more personalized solutions, like managed accounts, for example, or some form of advice,” Stempien adds.

Regardless of which solution plan sponsors choose, they will need to vet their providers and provide targeted education to participants.

“You want to make sure you’re offering really good education materials and guidance through your plan provider to educate your participants about how the solutions will benefit them and how they should be thinking about allocating to them,” O’Connor says.

More on this topic:

What to Know About Adding Income to a Plan Lineup
Does the 4% Rule Still Stand?
Comparing Insured and Non-Insured Payout Options
Beyond the Annuity Puzzle: Rewiring the Psychology of Lifetime Income
In Practice April 1, 2025

Does the 4% Rule Still Stand?

The spending rule has been around for 30 years, but experts are rethinking traditional drawdown approaches in light of longevity and economic realities.
Reported by

Since its creation more than three decades ago, the 4% rule has been cited as a simple guide for retirement withdrawals. The approach to finding a “safe” initial withdrawal rate involves pulling 4% of your retirement savings in your first year of retirement, then continuing to do so each subsequent year while adjusting for inflation.

When the 4% rule was published by Bill Bengen in 1994, it was groundbreaking, says David Blanchett, head of retirement research for PGIM DC Solutions. It remains a novel piece of research in the retirement industry.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“It was and is still relevant today,” Blanchett adds.

But given the rule’s age, it is important to ask how some of its key assumptions can be improved upon to make it more relevant. In today’s economic climate, retirees are facing market volatility, inflation and increasing longevity—and industry experts are rethinking traditional drawdown strategies.

The State of the 4% Rule

In past years, when interest rates were so low, Wade Pfau, author of the “Retirement Planning Guidebook” and a professor of practice at the American College of Financial Services, says he was concerned about the viability of the 4% rule. But he now feels more comfortable with its ability for success.

“Today, with interest rates being higher, if you wanted 30 years of inflation-adjusted spending, you could build a 30-year TIPS ladder,” he says, referring to Treasury inflation-protected securities. “Right now, with interest rates, that would support about a 4.6% withdrawal rate.”

But interest rates fluctuate, and if they do drop, the sustainable withdrawal rate could fluctuate every day. In short, the 4% rule is a “research simplification,” Pfau explains. It does not take into account variations in cash flow—including whether Social Security has kicked in for a retiree yet—or taxes, which do not grow with inflation. The rule also maximizes sequence-of-returns risk because retirees never adjust spending in relation to how their portfolios are performing.

Those who implement the rule also need to account for its assumptions, including that it is specifically designed for a 30-year retirement.

“The 4% rule is a reasonable starting point,” says Amy Arnott, a portfolio strategist for Morningstar. But, she says, it won’t make sense for everyone.

Flexible Spending Methods

When Morningstar published its most recent “State of Retirement Income” report, the firm recommended people be slightly more conservative: a 3.7% withdrawal rate for those who want to follow a steady-state approach, withdrawing the same amount each year and adjusting it for inflation.

But Arnott says there are other approaches retirees can take that boost that figure. She and the other authors behind Morningstar’s report looked at four different flexible spending methods. They estimated that on one end, the safest withdrawal rates for the basic approach, in which anytime the portfolio value is down, a retiree skips the inflation adjustment the following year, was 4.2%. On the other end was the guardrails approach, where retirees compare the estimated withdrawal rate with the portfolio balance each year and make adjustments if that portfolio performs outside a certain level, with a safe withdrawal rate of 5.1%.

When it comes to deciding which withdrawal method makes sense, Arnott says retirees should consider what is important to them: Is it having a consistent level of income or maximizing the amount they can take out, especially early in retirement? Do they really want to leave a legacy behind for family members or charity, and are they comfortable with variations in cash flows from year to year?

“Another thing to think about is how much uncertainty you’re willing to live with,” she says, adding that Morningstar is “very conservative” in its estimates and uses a 90% probability of success that some savers may be willing to bump down. She also recommends considering guaranteed income, including Social Security income or a pension or the possibility of purchasing an annuity to support part of retirement spending.

Guided Spending Rates

Blanchett says PGIM uses an approach in line with the research behind the 4% rule, but based on a different model: guided spending rates. The approach uses forward-looking returns (instead of historical returns, which the 4% rule uses) and allows for savers to take into account their perceived level of flexibility. The spending rates have three levels—conservative, moderate and enhanced—that tend to be approximately 4.0%, 5.0% and 5.5%, respectively, according to PGIM’s 2024 report on guided spending rates.

The research supporting the 4% rule—and many financial planning tools—determines the “safe” withdrawal rates by focusing on whether the retiree’s goal is accomplished in its entirety, which does not leave room for considering the total amount of the goal accomplished and potential implications if there is a shortfall, according to the report.

“The problem with that is: What if you want to have $100,000 a year in retirement for 30 years, and then in the 30th year, you fall $10 short? That would be considered a failure in that kind of model, but it’s not a failure; you’ve accomplished all of your goals,” Blanchett says. “So we’re thinking about outcomes, more than just success rates.”

Most American retirees have lifetime income to cover most of their essentials, which means the implication of making a change are not as dire as analyses that use success rates and treat a $1 shortfall as failure, Blanchett says.

“You don’t want to go broke when you’re alive, but you also don’t want to get to the age of 80 and think, ‘Gosh, I could have done all these cruises and really cool stuff when I was a younger retiree,” he adds.

More Alternative Approaches

The 4% rule is an appropriate starting point for somebody more comfortable relying on portfolio growth and market growth to fund retirement expenses, Pfau explains. But starting there dismisses the bucketing approach, which involves allocating money to three separate buckets, each of which corresponds to a different time period in retirement, as well as income-protection approaches.  

“A lot of people will be more comfortable having more protections built in,” Pfau says. “The 4% rule really is just taking the pre-retirement investment management and just applying that post-retirement as well.”

More on this topic:

What to Know About Adding Income to a Plan Lineup
Understanding and Evaluating Retirement Income Solutions
Comparing Insured and Non-Insured Payout Options
Beyond the Annuity Puzzle: Rewiring the Psychology of Lifetime Income

«