Options Crucial for Retirement Tier Investing

As plan participants in their 50s and 60s contemplate retirement in earnest and take advantage of Roth catch-up contributions and other tactics, industry experts say plan advisers and sponsors should adopt a “retirement tier” strategy. A four-part PLANSPONSOR roadmap series about retirement tier investing explored how participants can benefit from a range of product solutions, tools and services, as they transition from saving in a plan to spending in retirement.

Key first steps for sponsors to set participants up for success include both deciding whether to encourage retirees to stay in the plan and ensuring recordkeeper integration. Karen Witham, vice president of committees and communications at the Defined Contribution Institutional Investment Association, stressed the importance of aligning investment policy statements with a retirement focus. She also recommended using data, surveys and peer groups to better understand participant needs and foster a community related to retirement planning.

Advisers are increasingly using artificial intelligence, and while AI tools can help with modeling plan distributions, managed account services and delivering tailored advice, speakers said they cannot replace personal trust and authenticity.

Colby Carter, managing counsel at the Tennessee Valley Authority Retirement System, said personalized guidance and one-on-one advice were crucial for agency employees navigating retirement decisions. The TVA’s comprehensive contribution and distribution options included pre-tax, Roth and after-tax contributions, systematic withdrawals, required minimum distribution support, target-retirement portfolios, target–date funds and managed accounts.

Choosing ‘Retirement Class’ TDFs

TDF suites are popular choices for retirement plans because they can maximize the efficiency of employers’ plans. Janet Yang, director of multi-asset and alternative strategies at Morningstar, said investor returns on TDFs reinforce the strength of the asset class as an investment choice.

“Unlike a lot of other categories where you see investors coming up short, that has not been the case with [TDFs], where workers have stayed invested,” Yang stated. “The actual returns … have just really outstripped expectations.”

According to Yang, Morningstar tracked 37 target-date funds with a 2025 vintage that had outpaced expectations from commonly used target-date investing models from 2010. Over the past 15 years, average allocations to equities within TDFs have increased due to low interest rates, higher life expectancies and greater growth potential, Yang explained.

Her research also revealed that stronger TDF performance comes from lower fees and greater use of index-based strategies. Index-based funds generally outperformed both blended funds (in which active strategies make up 25% to 75% of a series’ underlying holdings) and active-based counterparts.

Yang noted the recent crossover between TDFs and annuities, saying more than a dozen target-date strategies with annuities have launched, totaling about $60 billion in assets. That model frees the plan sponsor from complicated choices, as the target-date provider of the plan sponsor’s choosing picks the type of annuity and conducts a due diligence check on the insurance company.

As for choosing a qualified default investment alternative, Bryan Peebles, managing director of Strategic Retirement Partners, said plan sponsors should look at participation rates and plan design, including whether a plan has automatic enrollment. He said that when he speaks with plan sponsors, he tells them the top-performing plans focus on plan design to determine which QDIA is the best fit.

Withdrawal Strategies

When it comes to withdrawals from retirement accounts and ensuring income longevity and sustainability, employers should work with recordkeepers and advisers to ensure options work for participants and retirees, according to the panelists.

“A lot of employees do not have the financial acumen to build a smart withdrawal strategy,” said Robert Fortin, senior manager of benefits wealth at the National Railroad Passenger Corp., which operates as Amtrak. “The biggest challenge that we face as employers is letting our employees know there [are] financial tools available to them.”

Kelli Send, co-founder and senior vice president of financial wellness services at Francis LLC, said plan sponsors can host special workshops for pre-retirees, focused not only on 401(k)s, but also on issues including Social Security and Medicare. She also said she likes to frame the concept of guaranteed income to her advisees as “buying a pension”—which may be a novel concept to those desiring a traditional defined benefit plan.

Fortin agreed that messaging matters. At Amtrak, his team is crafting a message that employees need to take their financial health as seriously as their physical health, and utilize financial tools provided by employers.

Working With Recordkeepers

If participants decide to roll their assets out of the employer’s plan, recordkeepers play an important role in determining where those assets land, according to Send. She explained that because of “very small” margins in the recordkeeping business, recordkeepers’ websites may be designed to gear employees toward rolling assets into an individual retirement account, rather than staying in their plan or choosing another rollover IRA provider.

Send said plan sponsors should ask recordkeepers to provide a “deep dive” into how the distribution process works, especially relating to fund-specific withdrawals, to ensure participants are aware of options and to make the process as seamless as possible.

Kelly outlined three main options to replace receiving a paycheck when a participant retires: annuities, target-date funds and TDFs with “an insurance policy” to prevent the retiree from running out of money, even if they have spent down their retirement plan assets.

Fortin acknowledged the models but commented that the uptake has been “slow.” He said there needs to be a way to simplify the options, then sell them to participants and drive engagement up. Without such engagement tools and ways for employees to understand creating retirement income, those employees may continue to work because they are unaware of options that could help them retire with enough money, he said.

Simplifying Documentation, Communication

Industry experts said employers who want to keep retirees in their defined contribution plans—and help them draw down assets effectively—must be ready to change both their plan documents and how they communicate with those participants.

Send said employers’ investment policy statements should describe how income products will be evaluated, including cost, performance relative to objectives and the financial strength of providers.

Retirement tier solutions often involve new investment products, such as managed payout funds, income-oriented target-date funds or in-plan annuities. The solutions require fiduciary oversight, Send said, noting that “retirement tier” belongs in the plan’s investment policy statement when it introduces an investment vehicle for income.

Witham said plan administrators should avoid jargon and lead with participant benefits. For example, “decumulation” can be replaced by terms more meaningful to a retiree, such as “monthly income” and “financial security.” Employee resource groups for near-retirees and internal departments such as human resources can further help with outreach and communication about different topics.

“We have a good opportunity here for both education and to help these folks make some of these holistic financial and retirement-related decisions,” said Deb Dupont, LIMRA’s assistant vice president of institutional retirement research.

Recordings of these four seminars are available on-demand.