Retirement Income Revisited:
What the Industry Needs to Get Right in a
By Anne Ackerley
The pandemic exposed dangerous gaps in America’s social safety net, from disparate access to health care to the precariousness of work, but one gap in particular has gotten too little attention in the media and in Washington: the lack of access to a financially secure retirement.
The urgency of the pandemic rightfully prompted companies to focus on immediate employee relief efforts. As we start to envision a post-COVID-19 world, forward-thinking employers are already moving to address long-term financial security. With all eyes on recovery, it’s time for the public and private sectors, working together, to revisit retirement income and build a more financially secure American workforce for the future.
To chart a path toward this vision, we outlined three big goals at our inaugural BlackRock Savings Summit last year, one of which was that, by 2030, every American should have the option of a guaranteed income solution built directly into their workplace retirement plan. The approach taken to accomplish this should focus on three key objectives:
1. Build on What’s Already Working
As a fundamental premise, any solution has to build on the concepts and tools with which participants are already familiar.
Workplace plans generally represent the bulk of an individual’s savings at retirement. By embedding guaranteed income options in those plans, we can meet people where they already are. This will help them understand the new options and promote adoption.
Guaranteed income options should become a standard feature of the target date fund, the most popular qualified default investment alternative today. This would preserve the accumulation experience that traditional target date funds already provide. Paired with plan design features like auto-enrollment, auto-escalation, it could offer a powerful new way to enhance outcome certainty for participants.
2. Make it Easier for Plan Sponsors and Participants
Decumulation is complex — for plans and participants alike. Even the Nobel Prize-winning economist William F. Sharpe thinks it’s the “hardest, nastiest problem in finance.” Naturally, guaranteed income solutions that solve for this complexity will win the day.
This is why, in part, guaranteed income solutions already on the market haven’t taken off. Annuities, for example, are often cited as expensive, illiquid, and hard to understand, so for most plans, simply tacking a guaranteed income option onto the plan menu won’t fit the bill.
The whole class of solutions has to be reworked to address the specific needs of a defined contribution (DC) plan and its participants: daily valuation and liquidity. This requires an investment in both product design and partnership, which would be time well spent. Investment managers, insurers, consultants, and recordkeepers must work together to streamline the annuity purchase process to reduce fees and simplify selection and monitoring.
3. Increase Flexibility and Simplify Delivery
Every participant’s circumstances are unique, which means that decisions about whether to annuitize and when to start receiving payments are personal. Providing flexible product features that respond to participants’ needs — a significant improvement over the “all or nothing” approach to guaranteed income made commonplace by pension plans — is necessary.
How we frame this information is also incredibly important. Participants need solutions that enhance outcome certainty in retirement. They also need to understand what that really means. For most participants, retirement is an abstract idea, and retirement income an even hazier concept. While retirement income tools and spend-down calculators can help at the point of retirement, we can leverage technology to give participants a better idea of what they’re on track for, starting much earlier in their careers.
The goal is to empower participants to feel in control of their own financial futures – and, from a packaging and delivery standpoint, that means meeting people where they are, with the information they need, when and how they want it.
The task before us is to put philosophy into practice — something we cannot do without the collective effort of the entire retirement ecosystem. Policymakers are in a unique position to accelerate progress, as we saw with the passage of the SECURE Act of 2019, which paved the way for broader adoption of retirement income solutions.
We should build on this momentum as an industry. Additional legislation on access and annuitization could further increase financial security.
Nearly half of private sector workers lack access to employer-sponsored retirement savings plans, and nearly half of older households have no retirement savings. Yet, we also know that people are 15 times more likely to save for retirement when they have access to a workplace plan, and 20 times more likely to save if those savings are automatic. Recent research by Georgetown University’s Center for Retirement Initiatives shows why expanding access should be at the top of our priority list and at the forefront in talks of a bill that would require employers to offer their workers an option to save for retirement. Similarly, we should expand access to guaranteed income in retirement, which could be achieved if plans were required to offer an annuitization option.
If we act swiftly and with purpose, we can build a better retirement system in which every American has a path to dignity and certainty in retirement.
It’s the right thing to do, and it’s the right time to do it. Together, we can make it a reality.
Anne Ackerley, Managing Director, is Head of BlackRock’s Retirement Group, the industry’s largest DCIO provider, serving more than 65,000 defined contribution plans, including over 60% of the Fortune 100, and ultimately reaching more than 35 million participants across the US and Canada.
April 2021, 21-03
Antonelli, Angela (2020), What are the Potential Benefits of Universal Access to Retirement Savings? Georgetown University Center for Retirement Initiatives in conjunction with Econsult Solutions, Inc.
Harvey, Catherine Harvey (February 2017), Access to Workplace Retirement Plans by Race and Ethnicity, Fact Sheet, AARP Public Policy Institute.
US Government Accountability Office (GAO) (March 26, 2019), Retirement Security: Most Households Approaching Retirement Have Low Savings, an Update, GAO-19-442R.