PLANADVISER: Why do you believe that target-date funds (TDFs) should incorporate retirement income components?
Anne Ackerley: I’d start by saying that we need to be thinking about retirement income solutions, in part, because future retirees will face a very different environment. BlackRock research finds that current retirees aren’t spending down their retirement savings very fast. A substantial portion of retirees today have 80% or more of their savings nearly 20 years into retirement. This can largely be attributed to the fact that retirees have benefited from additional sources of retirement income, like Social Security and strong equity market returns.
We believe the environment for future retirees will be different. The option to not spend down retirement assets will likely be off the table, so we need to help people understand how to spend in retirement.
Both plan participants and plan sponsors agree on this. Our annual DC Pulse survey found that 93% of participants are looking for guidance on how to spend their assets and 90% of plan sponsors feel responsible to help. That’s where target-date funds (TDFs) can provide a solution. Target-date funds have functioned as great products to help people save. Why not use this successful, existing product set to help people spend down their assets? We think this makes a lot of sense.
PA: Is this how you define “auto retirement”?
AA: As we talk about it, “auto retirement” is the new frontier of auto features. Think about what has been successful in helping people save—plan design features like auto-enrollment and auto-escalation, paired with “set it and forget it” investment vehicles like the target-date fund as a qualified default investment alternative (QDIA). In other words, what’s worked has been a combination of tools and products that leverage what behavioral finance has proven to be true. People tend to be subject to inertia, so let’s make that work to their benefit, during accumulation and decumulation.
Auto retire applies these same principles to the spending phase. There will be a range of solutions. But we believe this new term calls for a combination of products, tools and technology to help participants translate a lump sum into a consistent stream of retirement income.
PA: How can plan sponsors make TDFs part of the “auto retire” framework?
AA: There are three things that plan sponsors can do to make a target-date fund part of an auto retire framework. First, when evaluating a target-date fund, they should look for one that is designed both for accumulation and decumulation of assets. Not all target-date funds are.
Second, plan sponsors need to make sure that their plans allow for periodic distributions. Very early, when 401(k) plans were first being started, plan sponsors set up their plans for a one-time lump sum. They need to go back to review their policies and work with their recordkeeper to make this adjustment.
Third, plan sponsors should think about a spending tool that can be integrated with the target-date fund. The BlackRock LifePath spending tool, for example, provides retirees with an estimate for how much they can spend in retirement each year. By putting in their age and retirement savings, a retiree immediately receives an estimate for current-year spending and its impact on their savings up until the age of 95.
PA: How difficult is it for recordkeepers to support target-date funds that include a retirement income component?
AA: Most plans today aren’t set up to allow for flexible distribution options. To enable that, plan sponsors can absolutely work with recordkeepers toward solutions that would allow retirees to automatically receive consistent income throughout retirement, including more frequent and periodic withdrawals.
PA: And what if the target-date fund includes a guaranteed income component in the form of annuities?
AA: The need for retirement income is going to result in a spectrum of products. The BlackRock LifePath funds, combined with a spending tool is one approach. Certainly, another could be to include some form of guaranteed income in the target-date fund. We currently offer the Lifetime Retirement Income product with annuities embedded. However, we are still in the early days of in-plan annuity use. Plan sponsors are only just starting to consider the full spectrum of options.
PA: What are the upsides and downsides of including an annuity in a TDF?
AA: The upside is that because participants have become very familiar with TDFs for the accumulation phase, we think that adjusting TDFs for retirees to help them spend their assets down is going to be a real advantage. As far as downsides are concerned, while our Lifetime Retirement Income product is straightforward, other TDFs with annuities embedded in them have been complex and require a fair amount of participant education.
PA: Are you finding that more plan sponsors are interested in retired workers remaining in the plan?
AA: Yes, particularly as more people are retiring every day. The benefit is that the employee continues to enjoy institutional pricing. And certainly the fiduciary rule, while it is going through some changes, has put a focus on what happens to assets in retirement.
More and more plan sponsors and participants are focusing on what happens in retirement. Our DC Pulse survey found that nine in 10 plan sponsors feel responsible for helping people with their retirement planning needs, and 93% of participants want more guidance. Across the industry, there is more focus on how to manage retirement income, and BlackRock believes target-date funds can offer a good in-plan solution.