The Appeal of Guaranteed Lifetime Income Option Is Growing Among Participants

While more participants are looking for a consistent source of income in retirement, they also want the flexibility to change their payments when needed.

By DJ Shaw



Invesco has released findings from its 2022 defined contribution retirement income study, which explores participant preferences for creating retirement income and fiduciary considerations for plan sponsors when evaluating retirement income solutions.

The “Show me the income” study focuses on a few key areas, including on how plan participants think about retirement income in general, what type of in-plan solutions may be most attractive to them (and why) and how best to bridge the savings-to-income gap moving forward by examining how participant and plan sponsor mindsets differed at times.

Participants view retirement differently, driven by their unique personal experiences, goals and financial resources—with no clear-cut behaviors across generations, income levels or gender, the study says. Most participants believe their defined contribution plan (83%) will be their largest source of retirement income, followed by Social Security (63%), and personal savings and investments (58%).

Even for those with traditional defined benefits plans, 79% said they expect their defined contribution plan to be their largest source of retirement income, the study says. This highlights the importance of DC plans to both corporate and public employees.

Participants expect to rely on the DC plans in retirement, but 68% say they were worried they would eventually run out of money—a fear felt even from those who work with a financial professional, with higher incomes or have a defined benefit plan, the survey says. While 78% of plan sponsors said they provided communications, just 38% of participants remembered receiving it.

As plan sponsors and advisers work to solve “the retirement income crisis,” many sponsors are often unsure of how to proceed, the study says. Plan sponsors want more information and guidance from advisers and regulators concerning fiduciary risk around guaranteed income products before adding new solutions to their plan menu.

The study found that participants want a consistent, monthly income stream to reliably cover their basic expenses, including housing, food and transportation, with the flexibility to withdraw additional spending for travel or emergencies.  

If given a choice, 90% of participants said they would allocate their DC savings into more than one retirement income option, the study says. Overall, 94% said they want a guaranteed lifetime income solution that provides stable, predictable income where they won’t run out of money. Though having to make a tradeoff between a guaranteed or non-guaranteed flexible income solution (84%) that allowed them to make changes to their month payments was less attractive, 88% prefer a split between providing reliability and flexibility.

According to the study, participants felt good about guaranteed income options because they couldn’t run out of money even if their account balance is depleted (96%), it provides stable, predictable income that makes budgeting easier (95%) and its less expensive through an employer than outside of a plan (95%).

While participants like the idea of guaranteed income options, many felt the disadvantages include a lack of control over the monthly payments once they are set (92%), the annual cost (91%) and a lack of access to withdraw larger amounts as needed (90%), the study says. Even with these concerns, however, just three in 10 listed it as a major deterrent.

The appeal of a guaranteed lifetime income option is growing among participants, and plan sponsors are starting to take notice. Among plan sponsors, 98% felt that offering a guaranteed solution would be a good fit for their participants, the study says. Many saw value in how it could help retain plan assets by providing participants with predictable income that was easier to access and less expensive than what employees could get outside of the plan.

Even if a small percentage of participants take advantage of it, 92% of plan sponsors agreed that it was worth offering, the study says. However, sponsors viewed the potential for additional fiduciary risk to the plan, higher costs, and a participant’s inability to access larger amounts as needed as top disadvantages.

Invesco partnered with Greenwald Research to conduct the research from March 2021 through April 2022. The study surveyed 100 plan sponsors online and more than 1,000 plan participants (all working for large U.S. organizations with 5,000 or more employees). There were 12 participant focus groups, nine interviews with plan consultants and advisers and nine interviews with large-plan sponsors.

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