Guaranteed Income Options May Boost Retirement Confidence

Interest in access to guaranteed lifetime income in retirement rose during the pandemic, but education and adoption has been slow.

More employers are starting to question whether traditional target-date funds—the default retirement-plan option for millions of Americans—are setting up employees for success after they stop working, according to TIAA’s newly released 2022 Retirement Insights Survey.

The survey, which polled more than 1,500 employers and employees, revealed that 66% of employers feel TDFs will help employees meet their retirement income needs, down from 78% in 2020.

Employers are also increasingly concerned about their employees “not saving enough for retirement” (66% in 2022 vs. 57% in 2020) and “risking outliving their savings” (63% in 2022 vs. 58% in 2020). Almost three-quarters of employers (72%) now say they are highly interested in a new generation of TDFs that includes some allocation of lifetime income.

“Employers are beginning to recognize several critical shortcomings of traditional target-date funds and now seek retirement offerings that safeguard their employees’ savings and provide options for guaranteed monthly income for life,” says Colbert Narcisse, chief product and business development officer at TIAA. “Plan sponsors can better help participants by providing new customized target-date solutions that offer greater personalization and include access to guaranteed income in retirement that cannot be outlived. These solutions can also help dampen portfolio volatility in a rising interest rate environment.”

Though 77% of employees continue to say that saving for retirement is their top priority, more than half (51%) say the pandemic has increased their anxiety about their ability to retire when they want, TIAA says. At the same time, more employees say they are very or extremely interested in guaranteed lifetime income within retirement plans than they were in 2020 (54% in 2022 vs. 51% in 2020), and nearly half (48%) say their interest increased during the pandemic.

Target-date funds have helped employees as they work through the accumulation phase, but the decumulation phase is largely untested, and employers are questioning if they are the right vehicles to help those in retirement, says Tim Pitney, managing director of institutional investments at TIAA. According to him, a more customized TDF that can include a GLI option may be a better solution.

“There’s growing interest in customized solutions, and specifically, customized solutions that embed a guaranteed solution in place of bonds that could be stable value,” Pitney says. “We’re seeing great interest in using liquid fixed annuities within the target to customize target-date structures as an alternative to bonds, and it’s become especially noticeable in this rising interest rate environment.”

According to the TIAA survey, few employers (34%) currently offer GLI options, and only 38% say they are familiar with provisions in the Setting Every Community Up for Retirement Enhancement Act that improved access to in-plan GLI. The majority of employers (85%) who are familiar with and already offer in-plan GLI options say they are valuable for employees. Among those not currently offering GLI, 43% say they are extremely or very interested in it.

While employees have shown interest in in-plan GLI options, perceived cost is still a primary barrier for nearly half (48%) of employees. To appeal to employees, employers will need to emphasize the lower costs of these options when they are included in their plan versus outside of the plan, the survey says. When participants are asked how their interest in investing in a GLI annuity would change if it was offered at a lower cost through their company’s retirement plan, 73% say they’d be more interested.

There has been growing interest in and appreciation of the need to improve access to guaranteed lifetime income options in retirement—more now than there has been over the last 10 years, says Sanford Koeppel, a retired retirement industry professional who served as vice president of legislative and regulatory affairs at Prudential Financial and sat on the U.S. Department of Labor ERISA Advisory Council. Still, even with growing interest, some plan sponsors have been slow to adopt such options because they feel annuities and other guaranteed products create fiduciary responsibility and added expenses and administration.

In a voluntary system, it makes sense that plan sponsors would choose to not be burdened by introducing GLI options. In order to make GLI options more accessible, Koeppel suggests that ERISA should be amended to require that all qualified plans make GLI a distribution option for all or any part of a participant’s savings, which could cause utilization rates to spike dramatically.

An annuity form of distribution was once a requirement of retirement plans, but after Congress passed the Retirement Equity Act of 1984 and the IRS issued a series of rule changes, they were no longer required, and employers could exclude them from defined contribution plans without violating the law, Koeppel says. This has put employees’ retirement security at risk—and while some industries remain fortunate enough to have access to defined benefit plans, those are slowly disappearing as well, he adds.

By embedding fixed annuities within target-date portfolios, Pitney argues, you can still get the best of what target-date funds have done during the accumulation phase: helping employees to have a better asset allocation. But, additionally, volatility will decrease, thanks to the introduction of annuities in place of bonds during accumulation. There is also the option—not an obligation—to annuitize, thereby allowing people the flexibility to create their own level of a personal pension at retirement.

Overall, less than half of plans (41%) are offering auto-enrollment or auto-escalation. TIAA suggests sponsors consider adding these provisions, especially given the positive momentum that is building behind the Securing a Strong Retirement Act, referred to as SECURE Act 2.0. Among its many provisions, the follow-up legislation would allow for increased participation rates and further simplify plan administration.