Nuts & Bolts: Nonguaranteed Managed Payout Solutions

Sometimes retirement income solutions do not need to be permanent. One of the first retirement income strategies ever developed for defined contribution plans was nonguaranteed managed payout solutions, designed to facilitate systematic withdrawals without lifetime guarantees.

“Arguably the oldest [solution] in place has been the nonguaranteed income solutions,” says Kevin Crain, executive director of the Institutional Retirement Income Council. “When you look at systematic withdrawals, installment payments, things like that … nonguaranteed systematic type of withdrawal functionality has been on [plan recordkeepers’] platforms for decades.”

Unlike annuities, systematic withdrawals are rule-based approaches to determining retirement income, meaning payments are not guaranteed for the life of the retiree. When combined with a managed payout solution structure—typically a diversified, multi-asset portfolio designed for the decumulation phase that targets a specific payout rate and adjusts distributions based on market performance—the result is classified as a nonguaranteed managed payout solution.

‘Turning On’ a Supplement

According to the head of T. Rowe Price’s global retirement strategy team, Jessica Sclafani, managed payout solutions can play an important early role in a sponsor’s broader retirement income strategy.

“A managed payout solution can be a starting place for plan sponsors to begin their retirement income journey, which is likely to span several years and encompass multiple strategies,” Sclafani wrote to PLANADVISER in an email.

T. Rowe Price first introduced its Retirement Income 2020 Fund in 2017, featuring a nonguaranteed managed payout approach that provided monthly income based on a 5% annual withdrawal target, calculated from a rolling five‑year average net asset value.

In 2019, the firm brought the strategy in‑plan as a collective investment trust—the Retirement 2020 Trust–Income—for fully vested, terminated or retired participants age 59.5 or older, maintaining the same nonguaranteed managed payout structure.

Charles Schwab offers a similar approach through its Schwab Monthly Income Fund lineup, providing participants with access to managed, income-oriented portfolios within a nonguaranteed framework.

“These [nonguaranteed managed payout solutions] aren’t really where you would go for your main source of income,” says Inga Rachwald, an investment strategist at Schwab Asset Management.

Similarly, Sclafani wrote that the products work best when “supported by complementary participant tools and education.”

“In conversations with plan sponsors, the managed payout solution is generally seen as a feature they can ‘turn on,’ as opposed to a separate investment outside of the current suite of retirement date investments that would require more extensive monitoring,” Sclafani wrote.

From a participant perspective, Rachwald says uptake is often driven by self-directed individuals who are intentionally seeking a steady income stream—typically pre-retirees or early retirees with other sources of retirement income, such as Social Security.

“They have a 401(k), perhaps … Social Security and … they don’t want to tap into their 401(k) at this point,” Rachwald says. “Perhaps they don’t have to or don’t need to. So rather than leaving assets as they are, here’s an opportunity to put money to work and to have that income.”

That consistency can carry psychological appeal, she adds, particularly for participants transitioning away from employment.

The Challenges  

While nonguaranteed managed payouts are low-cost and offer flexibility, obstacles remain—especially familiarity.

“I don’t know that clients really have full awareness that these types of strategies exist,” says Rachwald. “It’s not a default option.”

Rachwald also notes that the solution could be added to the end of a participant’s 401(k) investment cycle, but there is often pushback from recordkeepers.

“Recordkeepers aren’t really set up to distribute the income, so that’s why you don’t see [these solutions] typically connected with 401(k)s,” Rachwald says. “That’s been a structural headwind.”

Awareness is building among advisers, according to Crain, who says these payouts can feel more approachable to advisers because their mechanics are already well-established.

“Advisers are beginning to work this channel more because there’s more upfront comfort,” Crain says.