Exploring In-Plan Retirement Income Solutions
To help prevent potential retirement delays, consider retirement income solutions to boost participants’ confidence in their future financial security.
Both employers and employees have a growing interest in in-plan retirement income solutions. With 66% of participants concerned about creating an income stream in retirement, this shows a signification interest in retirement planning tools that can convert savings into lifetime income.[1]
Offering in-plan retirement income solutions is one way to help participants plan for financial stability in retirement in order to retire on time. Why focus on in-plan retirement income solutions, and why now? Here’s what you need to know.
The growing need for retirement income
With the decline of pension plans and the rise of DC plans like 401(k)s, the responsibility to create retirement security has shifted from employers to employees. However, for many participants, saving is a challenge. If they manage to save enough for retirement, participants aren’t confident in converting their assets to a steady stream of retirement income they won’t outlive. Eighty-seven (87%) of participants expressed a desire for an in-plan retirement income solution to help them achieve their goals.[2] Moreover, today’s workforce is aging, requiring solutions that help provide a sustainable retirement income for as long as they live.
In an effort to boost retirement income success, there is an opportunity to support participants with income planning for the decumulation stage. Education is critical to improving retirement readiness: participants need to understand how retirement income solutions work and how to use them appropriately. Employers can leverage plan features like in-plan retirement income solutions to make their retirement benefits more competitive, increase employee engagement, and retain valuable talent. Few organizations currently offer this option, making it an opportunity to stand out as an employer of choice.
Plan design plays a pivotal role
Thoughtful plan design can significantly impact participants’ retirement income. Features such as default deferral rates, employer matching contributions, and professionally managed investment solutions all play a pivotal role:
- Default deferral rates often steer participant contributions. Many plans automatically enroll employees at the deferral rate of 3% of their salary, but most employees choose to “set it and forget it” and never increase their contributions beyond that amount. Plans with higher default deferral rate and auto-escalation, where contributions are increased at set intervals until a preset maximum is reached, promote saving more over time. This approach potentially boosts their retirement income.
- Matching contributions can substantially boost participants’ retirement savings. Encourage participants to contribute at least enough to receive the full employer match and maximize this benefit.
- Professionally managed investment solutions alleviate the burden of establishing a personal asset allocation strategy, constructing a portfolio of equities and fixed income, and then monitoring and updating it on an ongoing basis. The most common retirement plan default investment solutions are target date funds and managed accounts.
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This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.
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[1] Voice of the American Worker 2024. Franklin Templeton. 2024.
[2] Voice of the American Worker 2024. Franklin Templeton. 2024.
