Global Defined Contribution Organizations Consider Retirement Income Top Issue
A report said few DC systems are currently equipped to deliver income through the decumulation phase in a “standardized or robust way.”
TAI’s summary report, an abridged version of which was published July 28, found that organizations’ responses raise questions as to whether plan participants’ money has been “left on the table” during the asset accumulation phase. All plan sponsors surveyed offered flexible drawdown options, and several offered annuities and other lifetime income products. However, TAI found few DC systems are currently equipped to deliver income through the decumulation phase in a “standardized or robust way.”
Half the defined contribution plans surveyed offer a soft default—meaning participants can opt out—into a retirement income pathway, with larger funds leading the trend—possibly because they have a better capacity to design and implement post-retirement pathways. However, seven of eighteen plans continue to allow members to make an active choice on their decumulation pathway. WTW found “striking the right balance” between defaults and choices remains an obstacle for plan sponsors.
“In the DB scheme … income [was] pretty much guaranteed once [you] hit retirement,” says Jessica Gao, associate director of research at TIA. “But now with DC [plans], the risk is [borne] by individuals, and some areas are more mature than others.”
Gao says that, globally, providing secured income in retirement will be the biggest challenge for decades to come. Countries like Australia are ahead of the curve, as they had a DC approach “right from the beginning,” she adds. But not everyone is in the same boat.
While Gao says there has been no “transformative change” in the retirement plan market over the past five years, investing in alternative assets classes has sparked more conversation than in prior years.
Private markets offer “hope” for supporting retirement plan investment returns, the report found, as allocations to alternative investments are now equal in average allocation to bonds, at 20%. But constraints on cost, governance and operational readiness temper that optimism. Cost was almost a universal concern (81%) for those surveyed; low liquidity was an issue for about one-half; and more than one-third of respondents (38%) cited having concerns about operational issues related to private assets.
Additionally, some plan sponsors are trialing collective defined contribution models—which pay out benefits in the form of lifetime income but determine income level based on performance of the investments and mortality of participants—to help close the retirement security gap, the report found. However, the trial plans remain exceptions to the norm.
Gao says member engagement is another critical priority for DC retirement plans. Seventy-one percent of organizations surveyed said there should be a higher emphasis on retirement adequacy education across participants of all ages, and 36% said there should be more education targeted at younger participants, in particular. TAI’s research found that the challenge is translating the intent to educate into effective, ongoing engagement—especially when financial literacy varies and attention spans are short.
“Providing financial education early on … [helps] people have a bit more understanding of the returns and the future perspective of their pension,” Gao says. However, providing more financial education “requires government intervention.”
TAI partnered with LifeSight and Australia’s Aware Super to survey 20 organizations from across Asia Pacific, the Americas, Europe, the Middle East and Africa for this project. Collectively, the organizations had more than $2.2 trillion in assets as of the report’s publication this month.
According to WTW, the full report is expected to be released in October.