By Josh Cohen
“This time is different.”
We’ve heard it before. We heard it when technology stocks were skyrocketing in the late ’90s, and then just before the real estate bubble burst a decade ago.
The discussion of retirement income in defined contribution (DC) plans has that same feel now. Since I joined PGIM two years ago, the topic has come up in at least 80% of the discussions I’ve been having with large plan sponsors and consultants, and it has been incorporated as a recurring theme into conference agendas and other industry events. I knew, given PGIM’s expertise in asset allocation and liability-driven investment (LDI), as well as Prudential’s broader experience with providing guaranteed income options in plans, that it would be a topic of conversation, but I’m still surprised by how often it comes up.
This is not a new conversation. In fact, I remember having lots of conversations about this topic six or seven years ago, particularly when United Technologies implemented a lifetime income solution for its DC plan, making the company an early innovator in this arena. But not many other large plan sponsors took meaningful steps in this area.
Why the renewed interest now? Is this time different? In June, I hosted an event in Chicago attended by a few dozen large plan sponsors and consultants to explore this topic and discuss whether the time is now. Based on this and other conversations I’m having, I do think this time may really be different, and I expect we will start to see meaningful progress. Let me give you a few reasons why.
The Environment is Different
If you compare where we were when the conversations started a decade or so ago to today, the environment has continued to evolve. To start, the trend for the typical American worker to rely primarily, if not solely, on a DC plan rather than a defined benefit (DB) pension plan continues to accelerate. Of workers in the private sector who have access to a retirement plan at work, only 23% have access to a DB plan today, compared to 33% in 2008. At the same time, the percentage of the working population age 55 and older has increased from 18.9% in 2008 to 23.5% in 2018.
From the plan sponsor perspective, there is now a greater emphasis on financial wellness, with 65% of employers saying it’s an important focus, compared to only 20% in 2014. How does that relate to retirement income? If your focus as a plan sponsor is on having a workforce that’s more retirement-ready and less financially stressed, making sure your employees have a secure retirement plan is important to their ability to retire comfortably.
As an example, PGIM makes available to plan sponsors this worksheet to determine whether things have changed.
The Regulatory Backdrop May Be Different
When I’m talking to large plan sponsors, many tell me that they aren’t implementing a retirement income solution for participants due to fiduciary concerns. While a recent survey showed that 65% of plan sponsors prefer that participants keep their assets in their plan, many don’t take meaningful steps to make that more likely — they worry that participants could take legal action against the plan. Further, many are concerned that they don’t have sufficient fiduciary protections to select an annuity or other guaranteed income solution, given the complexity and long-term nature of such solutions.
It seems Washington is listening; the House of Representatives passed in May 2019, by a huge bipartisan majority (only three “no” votes), the SECURE Act, the biggest piece of retirement legislation since the Pension Protection Act. It has many provisions, but specific to this topic, it would provide plan sponsors fiduciary safe harbors in the selection of annuities in DC plans, subject to certain conditions. At the time of this writing, Senate action is pending and there is still some work to be done to make the proverbial sausage. If it passes, this new law would help demonstrate that the regulatory environment supporting retirement income is different this time.
Solutions are Different
Asset managers, plan providers, and plan sponsors continue to develop solutions that retirees can access to help achieve a secure retirement. Realistically, there is no one-size-fits-all approach. Individuals have different situations and needs, and supporting lifetime income for participants isn’t accomplished merely by putting a particular product on a menu. There are many things plan sponsors can do, from plan design to communications to tools and solutions, in efforts to support their employees’ retirement income objectives.
That being said, any solution is going to have to deal with a few of the unique risks that manifest themselves more clearly in the post-retirement phase than in pre-retirement. Two in particular are duration risk and longevity risk. It’s also clear that individuals will need professionally managed solutions and tailored advice to address their specific situations and needs.
To that end, a comprehensive solution will require thoughtful asset allocation, institutional investments, technology-enabled customization, an LDI framework to hedge risks and support a spend-down, and some form of guaranteed investments to hedge against longevity risk.
In summary, it sure feels to me that this time really may be different. While I can’t be certain, given the current environment, I feel strongly that we are moving toward a greater focus on retirement income. The ability for future retirees to have a more-secure retirement highly depends on this time being different.
Josh Cohen is a Managing Director and the Head of Institutional Defined Contribution for PGIM.
PGIM is a supporter of the Center for Retirement Initiatives. The views and opinions expressed in this blog post are the views of the author and do not reflect any policy or position of the Center for Retirement Initiatives.
Advisory Council on Employee Welfare and Pension Benefit Plans (2018), “Lifetime Income Solutions as a Qualified Default Investment Alternative (QDIA) – Focus on Decumulation and Rollovers,” Washington, DC.
Center for Retirement Initiatives, McCourt School of Public Policy, Georgetown University (2019), “2018 Policy Innovation Forum Report: Driving Change to Improve Retirement Outcomes,” Washington, DC.
Center for Retirement Initiatives, McCourt School of Public Policy, Georgetown University (2019), Generating and Protecting Retirement Income in Defined Contribution Plans: An Analysis of How Different Solutions Address Participant Needs,” Policy Report 19-02, June 2019, Washington, DC.
Martin Neil Baily, Benjamin H. Harris, and J. Mark Iwry (2019), “’RESA’: A look at 2019 legislative proposals to improve retirement security and saving,” Brookings Institution, Washington, DC.