Next-Generation Retirement Plans Will Deliver Customized Retirement Income Solutions

PGIM says evolving technology will enable plan sponsors and advisers to deliver on this promise.

While workplace retirement savings plans have evolved significantly over the past four decades, they still fall far short on delivering retirement income, investment manager PGIM says.

But PGIM says that by relying on technology, retirement plans will soon be able to not only deliver retirement income solutions—but to provide customized options.

Those personalized solutions could include managed accounts, model portfolios and advice engines, Josh Cohen, PGIM head of institutional defined contribution (DC), tells PLANADVISER.

Cohen says he’s optimistic that after years of discussion on retirement income with no real outcome, it will finally start to become a reality.

“There are a few trends that have been building up over time to get us to this point, starting with the movement from defined benefit [DB] to defined contribution [DC] plans,” he says. “Sponsors are also dealing with aging demographics and have more appreciation for the benefits of keeping participants in the plan. When you pair all of these developments with the product innovations that have been happening and the safe harbor for annuities that the SECURE [Setting Every Community Up for Retirement Enhancement] Act created, plan sponsors have become much more supportive of retirement income. But our research indicates that we must continue to evolve these offerings, particularly with the help of technology, to ultimately meet the decumulation needs of American workers.”

PGIM found that the current most popular “retirement income” offering that sponsors turn to is stable value funds, offered by 54% of plans. The fact that sponsors cite stable value funds rather than annuities or other guaranteed income solutions simply underscores the fact that true retirement income solutions are sorely needed, Cohen says.

As to what advisers and sponsors can begin to do to help participants establish better withdrawal strategies, Cohen says they can start by permitting participants to take systematic withdrawals; currently, only 49% of plans permit this.

“Communicating lifetime income projections, which will be required for DC plans subject to ERISA [the Employee Retirement Income Security Act] thanks to the SECURE Act, and allowing systematic withdrawals are relatively simple enhancements plan sponsors can make to have a positive impact on employees’ retirement income stream,” he says.

According to PGIM, the next generation of retirement income solutions should deliver both guaranteed lifetime income as well as non-guaranteed components that leverage asset allocation and asset-structure best practices, liability-driven investing (LDI) concepts and institutional investments.

Cohen added, “Plan sponsors need to evolve their defined contribution plans to focus not only on retirement savings, but also achieving adequate retirement outcomes. By embracing new technologies, robust income communications, customization opportunities and risk mitigation solutions with both non-guaranteed and guaranteed investments, DC plans have the potential to help workers meet their retirement income challenges.”