The Plan Sponsor’s Guide to Retirement Income is a resource for defined contribution plan sponsors for assessing and implementing solutions to help plan participants meet their income goals in retirement as well as improve their financial security in their savings and decumulation years. Each section offers practical guidance and industry best practices for setting plan objectives, designing plans, introducing glide paths with embedded income solutions and adding lifetime income solutions, which include insurance or guarantees, within retirement plans.

Participant education — a critical part of successful implementation of these solutions — and fiduciary and compliance issues for plan sponsors are highlighted as well. Each section aims to offer readers a better understanding of decision-making for retirement income solutions, with a primary focus on those that are insured, along with implementation steps, participant uptake, insights from AllianceBernstein’s leading industry research and a case study of a successful in-plan implementation.

I

PLAN OBJECTIVES

In recent years, many DC plans have broadened their focus from simply being savings vehicles to helping their participants generate sustainable income in retirement. The COVID-19 pandemic, with its adverse impact on job security, the sharp increase in inflation, rising interest rates and recent market volatility, has had a dramatic effect on the financial security of millions of workers and retirees. The situation has underscored the urgency of implementing retirement income solutions that can help workers improve their financial resilience in the later years.

Visit: AB Lifetime Income Strategy: Common Sense in a Complicated World

Since DC plans started to replace traditional defined benefit plans as the primary savings vehicle, “U.S. workers have faced an extraordinarily complex problem of first, how to save enough money to last for 20 to 30 years or more in retirement and second, how to draw down their various sources of savings in a way that creates a sustainable income stream,” said Jennifer DeLong, senior vice president, managing director and head of defined contribution at AB. These sources could include DC plans, individual retirement accounts, Social Security, traditional pension plans and other after-tax savings and investments.

In fact, AB’s annual DC participant research survey conducted over several years, titled Inside the Minds of Plan Participants, has shown that each year the most consistent response by participants about their most important goal for retirement is a steady income stream, said DeLong. In a widespread recognition of this need, the industry is at an inflection point and plan sponsors, industry providers and regulators have all come together to introduce and support solutions that can address that need.

We’re now seeing a mindset shift in the industry to thinking about a DC plan as a program that’s able to provide income throughout a worker’s retirement versus merely managing it as a savings vehicle.

Jennifer DeLong

SVP, Managing Director and Head of Defined Contribution, AB

“As an industry, we’ve fixed everything else except for the decumulation phase and providing sustainable income for life. Five years ago, plan sponsors recognized the need and were curious about what was available in the marketplace. But now, we see them making decisions, engaging in searches [for providers] and offering solutions that will help this and future generations of participants in retirement. That’s really exciting,” said Chris Nikolich, head of U.S. glide path strategies for multi-asset solutions at AB.

A majority of DC plan participants have unrealistic expectations about the amount of income in retirement that their DC plan can deliver, according to AB’s 2021 survey, Inside the Minds of Plan Participants.¹ Survey participants were asked to imagine that they retired at age 65 with $500,000 in savings and then, what percentage of their retirement savings they thought they could withdraw each year for the rest of their lives without running out of savings. Nearly half said 7% or more, and about a third said 10% or more, illustrating a lack of understanding of what would constitute a sustainable withdrawal rate.

Participants’ Perceptions of Income Certainly Vary Widely Percentage of Assets You Can Spend Annually and Never Run Out of Money

*Includes five ranges.
Source: Inside the Minds of Plan Participants, AB research, 2021

Given lower expected returns for traditional assets, the current recommended sustainable withdrawal rate is much lower for a majority of DC plan participants, according to AB’s research.² “This [discrepancy] is concerning,” said DeLong. “Overall, people greatly overestimate what they can spend, and without help, many may end up running out of money and having a problem in retirement.”

Participants rely heavily on their employers for support. Plan sponsors are empowered to help participants understand how their savings translates into income.

Jennifer DeLong

SVP, Managing Director and Head of Defined Contribution, AB

Interestingly, on the flip side, there’s also the challenge of participants spending too little in retirement. EBRI research³ showed that underspending and unnecessarily living below one’s means is also a risk that can impact retirees’ overall wellness. “A guaranteed source of income allows people to feel more comfortable and secure overall, and in some cases, that could mean being able to spend more,” said DeLong.

DC plan participants have demonstrated a strong preference for retirement income vehicles with two features: growth potential and easy access, according to AB’s research.⁴ When asked to select one of two choices in retirement, either:

two-thirds (67%) of DC plan participants took the first choice and were willing to forgo an additional $10,000 per year in guaranteed income in exchange for potential growth and access.

“With participants telling us that growth and liquidity are priorities [in retirement], it helps us design solutions that participants will want to use,” DeLong said.

Participants prefer growth potential and liquidity

Source: Inside the Minds of Plan Participants, AB research, 2021

To get started, as a best practice, DC plan sponsors should review the retirement needs of their participants and consider, as an employer, the specific plan objectives to achieve. Providing a retirement income solution can address several objectives, including:

Read: As Workforce Sentiments Change, Retirement Income Needs Haven’t

More plan sponsors today are engaged in thoughtful discourse on solutions and implementation.

Andrew Stumacher

SVP, Managing Director of Custom Defined Contribution Solutions, AB.

Section I footnotes
¹Withdrawal rates at which participants believe they can spend without running out of money. AB research, 2021: Inside the Minds of Plan Participants.
²AB research, 2023.
³The downside of spending too little in retirement. EBRI Issue Brief, In Data There Is Truth: Understanding How Households Actually Support Spending in Retirement, June 25, 2021.
⁴Participants prefer growth potential and liquidity. AB research, 2021: Inside the Minds of Plan Participants.

II

PLAN DESIGN

DC plan sponsors can take a methodical, participant data-based approach to determine the appropriateness of lifetime income solutions and how best to introduce them for successful uptake.

Sponsors first need to determine the overall plan philosophy: Either take a paternalistic approach, solving the retirement income challenge for employees via a default solution or take an approach that presents them with solutions to choose from, Stumacher said. This decision will have a clear impact on usage. That’s followed by a suitability assessment that includes several elements:

“There are many retirement income options available, so sponsors should focus on solutions that provide more benefits at a better cost than what participants can get on their own,” said Stumacher. Retail annuities and other retirement income products can be more expensive for employees to purchase versus products they are able to access in-plan. In addition, “as the solution has been vetted by the organization that’s the fiduciary of the DC plan, it gives [participants] more confidence they’re getting a good deal,” he said.

AB offers a practical, step-by-step checklist to help plan sponsors think sequentially through the different aspects of suitability of retirement income solutions for their plan participants.

The Initial Assessment Is a retirement income solution a fit for your plan? Take the first step by indicating how strongly you agree with each statement

Source: AllianceBernstein, Would Your Plan Benefit From a Lifetime Income Solution?

DC plan sponsors can streamline a multi-step process for adopting retirement income solutions. It starts with evaluating participant demographics, preferences and behavior. The results guide the evaluation of available income solutions, with input from experienced consultants and providers on cost and fiduciary considerations.

The starting point for plan sponsors is to fully understand their plan participants’ financial circumstances and behaviors in order to determine the need for a retirement income solution. It begins with savings patterns and preferences for current DC plan offerings. Record-keeper data can offer insights into risk tolerance, investment choices and whether participants are on the path to a successful retirement.

The next step is a review of the behavior of the near-retirees and retirees. “Track participant behavior leading up to and getting to retirement age,” said Stumacher. “Note whether participants withdraw systematically over several years or completely cash out of the plan.” In addition, assess how participants are using financial advice, either through a managed-account program or another external source.

Plan sponsors can then segment demographic data of cohorts by age and analyze the income needs for each segment. For example, participants near retirement with a generous DB plan and Social Security may have less need for a lifetime income solution versus those, say in their 40s, without a DB plan and with a greater need for income in retirement. The youngest cohorts of DC plan participants also could not have a DB plan and may not be able to rely on getting their full Social Security benefits in the future, given current projections on the adequacy of Social Security moving forward.

Industry data on DC participants’ needs and preferences can be instructive in evaluating income solutions. Most industry groups, such as the Defined Contribution Institutional Investment Association and the Employee Benefit Research Institute, publish regular participant surveys. Plan sponsors can also survey their own participants. “Get a fuller picture by talking to participants in your plan and the human capital representatives who interact with them. Clear common themes usually emerge around what participants want,” Stumacher said.

AB’s annual participant research has consistently shown that steady retirement income is the top objective for their own savings plan, followed by growth potential and direct access to their funds. “Participants generally don’t want to pay a cost for giving up anything, like growth potential, liquidity, flexibility or inflation protection,” said Stumacher. “What they’re missing is guaranteed income and the certainty and security that it represents.”

With all the retirement income solutions in the marketplace, evaluation starts with how they provide income in retirement.

The first thing that plan sponsors should do is take off their defined benefit hats and use a framework based on individual outcomes, not the outcome for the average participant.

Chris Nikolich

Head of U.S. Glide Path Strategies for Multi-Asset Solutions, AB

The evaluation should include considerations around certainty, growth opportunity, simplicity, portability, control and flexibility for participants.

In evaluating income solutions, plan sponsors also need to take into account unintended risks for plan participants. Most solutions are designed to alleviate risks, such as market risk and longevity risk. In addressing market risks, for instance, plan sponsors should help employees understand the impacts of different market cycles and investment horizons on retirement assets. For example, while low rates prior to 2022 made annuities relatively unattractive on a comparative basis, “with rates rising, annuities have become very attractive,” Stumacher said. “Seeing these different elements play out and how they affect participant behavior helps both plan sponsors and participants understand the importance of income.”

Unintended risks could come from trade-offs involved in product choices. For instance, a guaranteed income solution using fixed annuities eliminates longevity risk, but because it reduces exposure to growth-orientated assets, such as equities, it introduces a growth opportunity cost and inflation risk.

Mortality risk can be another unintended side effect if the participant has surrendered assets in exchange for a fixed annuity and dies younger than expected. Beneficiaries may be left with nothing, resulting in an investment loss. Half of plan participants are expected to die before the median life expectancy and are therefore exposed to this mortality risk.

Record-keeper support is a crucial aspect of delivering income solutions in a DC plan. Advances in middleware technology have enabled the conversion and standardization of data among record keepers, insurers and asset managers, each of whom utilize different platforms, said Stumacher. While the technology piece historically slowed some implementations, “many record keepers are now focused on how to support these solutions, and we’re getting much closer to mass adoption of retirement income solutions.”

III

ASSESSMENT AND IMPLEMENTATION

In response to industry demand for retirement income solutions, target-date fund construction has become more sophisticated, with customized approaches that can address individual participant needs. To make appropriate changes to the TDF or default vehicle, plan sponsors need to understand the nuances of the participants’ journey from the starting point of savings through to the end point of income distribution in retirement.

When we embed a guaranteed-income portfolio into a TDF, it allows us to maintain a higher equity allocation throughout retirement while also realizing the benefits of insurance and generating a sustainable income for life.

Howard Li

VP and Senior Research Analyst, Multi-Asset Solutions, AB.

As plan sponsors evaluate solutions that provide income for life, several considerations — each with its own trade-off — need to be considered:

AB’s Lifetime Income Strategy utilizes a guaranteed lifetime withdrawal benefit, or GLWB. It combines the income certainty of a guaranteed solution with the growth potential, liquidity, and flexibility of a nonguaranteed solution — attributes that have been consistently ranked highest by participants in the firm’s annual surveys.

“GLWBs can be used in-plan and in the default option,” said Nikolich, which helps plan sponsors move past the considerable challenge of ensuring adequate participant uptake. “Utilization of most other forms of insurance can be used only out of plan and they require a participant to opt-in.”

“When we incorporate a GLWB into the glide path, we consider it to be another asset class that is designed specifically to hedge longevity risk without introducing other side effects, such as growth opportunity cost or mortality risk,” explained Li. “This enables us to maintain a higher exposure to growth assets than a traditional target-date fund.” The increased growth potential can lead to higher expected returns that help to offset the explicit insurance premium, he noted. “Not only is the risk of running out of money eliminated, the participant’s assets also have greater growth capacity.”

While some DC plans would find a lifetime income solution most appropriate as a default feature, others may pursue adding it to the core menu for participants who tend to make asset allocation decisions on their own. While some ‘do-it-yourselfers,’ or those who may use a managed account offered by the DC plan, could access this lifetime income solution, take-up would likely be low. Furthermore, “while core-income strategies, including income, balanced or even stable-value funds, provide current income, they do not provide a guarantee of lifetime income,” Nikolich said.

“At AB, we believe a default solution is the most efficient way to provide a guaranteed-income stream to participants who are not equipped to do this on their own,” said DeLong. “It harnesses participant behavior to take what works — automated features and a predetermined path — and makes it simple. It’s also the best way to achieve widespread adoption.”

An outcomes-based design approach to the DC plan also needs to evaluate packaged or off-the-shelf versus custom income solutions. Packaged solutions are typically easier to implement for all participants in a plan. They provide economy-of-scale benefits for plan sponsors and can adequately address most employees’ savings needs. “However, closer to retirement, the issue of income becomes more personal and participants tend to be on very different paths,” said Stumacher.

Customized solutions require more effort and resources from the plan sponsor, consultant and provider, but can be more effective in improving retirement outcomes for individuals within a DC plan. A custom glide path not only accommodates different individual profiles, it also accounts for participants retiring at different times and with different needs for income certainty.

A packaged solution can’t address everyone’s needs [in retirement]. People have their own needs and preferences, and they need to be accommodated.

Andrew Stumacher

SVP, Managing Director, Custom Defined Contribution Solutions, AB

“Different participants need different solutions,” said Stumacher, noting that AB’s lifetime income approach is designed to be flexible for different situations. For instance, most employers, particularly public organizations, have distinct workforce characteristics in retirement. “Each plan sponsor needs a solution that recognizes the different needs of their participants, and we can customize glide paths to accommodate them,” he said.

IV

LIFETIME INCOME

The marketplace for lifetime income solutions has expanded significantly in the past five years, with several industry providers introducing new products.

A lifetime income solution provides the option to convert an individual’s savings into regular guaranteed income payments over their lifetime. A practical evaluation of these types of solutions starts with understanding their varying characteristics:

These features are interwoven into participant accessibility to the income solution: Is it through the default, built into a target-date structure, or an opt-in menu option? Timing is another consideration: Do participants access the solution before or at retirement? “And is there flexibility to change access to income solutions offered in cases of, say, employee promotions or other transitions,” said Stumacher.

Lessons from the savings phase
Since the Pension Protection Act was passed in 2006, the success of default mechanisms in DC plans, such as auto-enrollment and auto-escalation, has been evident from the growth in participant savings.

“There’s a reason that SECURE 2.0 went as far as mandating auto-enrollment and auto-escalation” for any new plan starting in 2025, Stumacher said. Having a guaranteed-income solution in the default carries these automated features over to the distribution phase, which can help participants achieve the income security and flexibility they want.

Total cost considerations
Plan sponsors should be aware that total costs for lifetime income solutions include explicit disclosed fees as well as some implicit costs that may not be immediately transparent. “Like the hidden part of an iceberg, these may not be easy to see and can be significant,” said Li.

Total Costs for Lifetime Income Solutions Critical to take a total-cost approach that looks at all aspects of the “iceberg”

*Single premium immediate annuity; qualified longevity annuity contract; guaranteed lifetime withdrawal benefit
Source: AllianceBernstein

For example, a single-premium fixed annuity does not have a fee because it requires participants to surrender their annuitized assets, so there are no assets to which to charge the fee. However, participants face a significant mortality-risk cost, because those who die younger than expected don’t receive the benefits after death, nor do their beneficiaries. While death-benefit riders are available, they are costly and reduce the amount of income paid. They also assume a growth opportunity cost as a result of the reduction in growth assets. “We estimate the annualized total cost of a single-premium fixed annuity contract is significant relative to the target-date fund. However, most people think it’s free,” said Li.

In contrast, a GLWB, which is an income insurance wrapper of a participant’s own portfolio, has an explicit annual premium just like any typical household insurance policy. It has no other hidden costs because the assets stay invested, Li said. “In fact, the total average cost of an integrated solution with a GLWB can potentially be reduced to zero because the higher exposure to growth can offset the premium.”

Comparing Key Features of Retirement Income Solutions

*Refers to managed-payout funds, managed accounts, target maturity funds and systematic withdrawal programs. While each of these functions differently and provides varying levels of success and personalization, the features are essentially the same.
Source: AllianceBernstein, Evaluating Retirement Income Solutions | AB (alliancebernstein.com)

Read: Lifetime Income Fees vs. Costs: Look Beneath the Tip of the Iceberg

AB, an early innovator in retirement income solutions, introduced its Lifetime Income Strategy in 2012, more than a decade ago, as an in-plan, guaranteed-income solution that integrates a GLWB into a target-date fund. It’s designed to provide participants with income certainty in retirement, along with growth potential and inflation protection, within a flexible structure. Using individual participant asset-allocation models customized by plan, it can address specific plan demographics and participant needs.

Its inaugural sponsor was United Technologies, now Raytheon Technologies Corporation — following a 2020 merger — which has continued to use the Lifetime Income Strategy. From its inception, the Lifetime Income Strategy has been enhanced to meet a wider range of plan sponsor objectives for a guaranteed-income solution, DeLong said.

While AB’s Lifetime Income Strategy is intended to be a default solution, participants can select the level of guaranteed income they want and at what age they will retire. In addition, plan sponsors who prefer not to embed lifetime income in the default solution can provide it to do-it-yourself participants who can select it for themselves.

The GLWB structure of AB’s Lifetime Income Strategy permits flexibility, revocability and portability, which allows beneficiaries to keep assets if the participant passes away early. Participants can realize lifetime income without giving up the growth, liquidity or inflation protection of a TDF. Also, it is one of the only in-plan guaranteed-income solutions backed by multiple insurers, providing built-in fiduciary protection for plan sponsors. “We have up to five insurers participating in our solution. They compete quarterly for new inflows and we diversify among them, giving plan sponsors the option for AB to act as the ERISA 3(38) fiduciary,” said Stumacher.

The participant engagement experience is key to successful adoption. As plan participants approach retirement, “they get feedback on what their situation may be in retirement with a recommended roadmap, so they can adjust their planning, if necessary, which we have seen leads to saving more,” he said. Earlier engagement also helps to protect against unexpected market risks close to retirement. “We want to make sure participants’ income is protected when the market doesn’t do well or when they live a really long time,” he added.

Case study for AB’s Lifetime Income Strategy: The State Universities Retirement System of Illinois (SURS)

AB implemented the Lifetime Income Strategy for the State Universities Retirement System of Illinois (SURS) in September 2020. SURS is an organization of 61 colleges and universities, has a DC plan with $3.5 billion in assets and approximately 23,000 members¹ — its preferred term instead of participants — who include retirees and active employees. Its members are diverse, including clerical staff, facilities staff, teachers and professors. SURS members are not eligible for Social Security.

Prior DC plan features
Before SURS embarked on a comprehensive plan to streamline and consolidate, it offered a 401(a) plan and a 457(b) plan, working with two record keepers. These had 29 investment options and three target-date series. At retirement, members could either surrender their assets for an immediate lifetime annuity providing guaranteed income for life, or they could take their money out of the plan.

More than half of members opted to cash out at retirement because they wanted control of their assets, despite the guaranteed income from the annuity. As a result of this decision, these retirees forfeited any earned health-care benefits. However, because the retirees lacked confidence that the immediate annuity could meet their income needs, they were willing to make that trade-off.

Current DC plan with in-plan Lifetime Income Strategy
SURS’ objective for a retirement income solution was to provide stable monthly income alongside flexibility and control for its members and transparent fees. In keeping with AB’s participant research results, the plan members also prioritized growth potential and liquidity. Following its search and evaluation process, SURS streamlined its investment menu, consolidated with one record keeper and selected AB’s Lifetime Income Strategy.

The key selection determinant was the Lifetime Income Strategy’s utilization of a GLWB annuity as a default option that could provide members both exposure to growth and liquid access, according to DeLong.

The GLWB annuity structure allows members to remain invested in the market throughout retirement, boosting their potential for asset and income growth. In a rising equity market, the income base rises and is locked in at a high point, protecting members from income fluctuations during market downturns, DeLong said.

In addition, SURS valued the Lifetime Income Strategy’s individual customization. It allows members to change their retirement age and modify the percent of their secure income anywhere from 100% down to zero, DeLong said.

Aligning a Retirement Income Solution with Members' Needs

Source: AllianceBernstein

Member retention
The success of AB’s Lifetime Income Strategy can be measured by SURS’ high member retention. Six months after the introduction of the new plan, 93% of members had stayed in the Lifetime Income Strategy. More recently, 94% of those who have secured income through the Lifetime Income Strategy for at least a year remain in it. These members are seeing guaranteed income build over time and are deciding to stay in the solution.

In addition, 99% of the members in the Lifetime Income Strategy are set to receive secure income payments at retirement. Only 1% chose to modify their level of guaranteed income to zero. “It’s clear that members recognize the solution’s value,” DeLong said.

Watch video series: Exploring Lifetime Income

Read: AB Lifetime income Strategy Overview: Unlocking Retirement Income

Section IV footnote:
¹ As of March 31, 2021.

V

EDUCATION AND COMMUNICATION

Annuities can be challenging for DC plan participants to understand, which makes education and communication particularly important in order to achieve successful uptake. Plan sponsors need to work closely with their providers to ensure participants receive the appropriate education, followed by regular communication, throughout all the engagement points that participants have with lifetime income solutions.

Use clear language
Best practices in the shift from retirement savings to retirement income include the use of simple, clear descriptions across several different types of communication materials so that participants have several touch points.

We always recommend meeting participants where they are. People learn in different ways, and they like to communicate in different ways.

Jennifer DeLong

SVP, Managing Director and Head of Defined Contribution, AB

Some participants may prefer top-line information that summarizes the product, how it works and key benefits. A short e-mail, video or — for those not on digital platforms — mailing an old-fashioned postcard for an information session may be most effective. Other participants may look for detailed information, with technical details provided in longer brochures.

For all participants, easy access to live information sessions, either virtual or in person, call centers and personalized planning tools are key aspects of a participant-communication program.

Make it interactive
Currently, as mandated by the SECURE Act, plan participants see an estimated income in retirement number, based on their current savings rate, on their annual DC plan statement.

In addition, via their plan website, participants should also be provided with information on how a guaranteed income solution can build up their retirement income over time and how they can increase that number by saving more. “We’ve found that people actually save more when they can see the relationship between their savings and projected retirement income,” said DeLong.

AB places a strong emphasis on DC participant communication to help ensure that employees understand and adopt investment solutions that help maximize their retirement security. In 2021, AB’s client SURS won a Pensions & Investments’ Eddy Award for its innovative, best-in-class investment education communications to DC plan participants.

SURS Wins Award for Communications Excellence: Eddy winners recognized for communications excellence | Pensions & Investments

VI

REGULATION AND COMPLIANCE

Legislators across the political spectrum continue to demonstrate strong support for retirement security for American workers. “Lawmakers have been able to pull off a bipartisan agreement twice within a couple of years, which is impressive. They recognize that this is an issue that needs attention and they want to see the impact,” said Stumacher. “Every new regulation and guideline is designed to get more people saving, give more people access and offer more income solutions because they know that’s the combination that will help participants” improve retirement security.

The first SECURE Act, the Setting Every Community Up for Retirement Enhancement Act of 2019, had taken a leap forward in its support of lifetime income solutions. It added a safe harbor provision that reduced the fiduciary risks for plan sponsors with an explicit process to assess the financial strength and creditworthiness of an insurance company as an annuity provider. In recent years, a number of lifetime income solutions have been launched by providers that are made available within the DC plan, referred to as “in-plan,” or outside it, referred to as “out of plan.”

Fiduciary considerations
Under the Pension Protection Act passed in 2006, the requirements for a QDIA in a DC plan include investment diversification and liquidity. If the income solution is part of the QDIA, or default, it needs to meet the requirement for liquidity, which disqualifies some types of annuities.

For example, certain immediate and fixed annuities that provide guaranteed income are illiquid and do not allow participants access to principal. While a path to purchase them can be offered during the accumulation phase, once the participant retires and the annuities begin to provide income, they are transferred out of plan.

“In contrast, a GLWB structure provides growth potential, permits beneficiaries to keep the assets if a participant passes away early, allows participants to change their minds and can be built to provide fiduciary protections,” said DeLong, adding that this flexibility and liquidity is a key reason their clients have chosen AB’s Lifetime Income Strategy.

Portability
The first SECURE Act specified lifetime income portability for DC plans. Prior to that, the lack of this feature had a big hurdle as plan participants faced the uncertainty of potentially discontinuing the investment if they moved to a new plan that couldn’t support these solutions. Prior to the Act, some retirement income products were considered a non-distributable event, and those participants could simply lose the benefits that they paid for or have to roll over their benefits to an individual retirement account.

After the SECURE Act’s passage, participants can roll over their lifetime income benefits to other eligible plans, including an IRA, or their DC plan can provide an annuity in lieu of the in-plan benefits.

Income estimate disclosure
The SECURE Act of 2019 required DC plans to provide an estimate of guaranteed income on participants’ annual statements, in addition to investment performance and expenses. Plans also must include the retirement income solution in the investment policy statement and specify their method used to calculate retirement income and communication guidance.

SECURE 2.0 has provided more access to DC plans via additional incentives to employers, eased their administrative burdens and expanded provisions to more participants — all of which is scheduled to continue rolling out through 2027.

Provisions that increase the availability and attractiveness of retirement income solutions include changes to required minimum distribution (RMD) limits for certain lifetime income features relating to annuities and increases to the amounts that can be allocated to QLACs.

VII

GLOSSARY

Auto-enrollment
An automatic contribution arrangement that allows employers to enroll employees automatically into a retirement plan unless the employee elects not to participate by opting out. Typically contributions are from employees’ pre-tax wages.

Auto-escalation
A DC plan feature that automatically increases participants’ contribution amount to the plan, usually annually, by a specified percentage until a predetermined maximum is reached.

Cash balance pension plan
A type of defined benefit plan in which the employer credits a participant’s account, usually based on a percentage of salary, and contributions increase with age. Participants may receive a specific benefit at retirement, often a lifetime income annuity.

Core menu
The list of stand-alone investment options offered in a DC plan, designed for participants who elect not to use the default option or QDIA and prefer to select their investments from other plan choices.

Deferred annuity
An annuity that starts to pay income benefits at a future date, usually determined at the time of purchase. Payment may be activated when a participant reaches a certain age in retirement.

Defined benefit plan
An employer-sponsored pension plan that provides a guaranteed payout, such as a lump sum or a lifetime annuity, for employees at retirement. Employers follow Employee Retirement Income Security Act of 1974, or ERISA, rules for contributions and payouts, based on salary, age and tenure of employees.

Defined contribution plan
A retirement savings plan to which employees contribute an amount that is intended to fund their retirement. They include 401(k) plans offered by public companies; 403(b) plans by nonprofits and 457 plans by nonprofits and state and local government entities. Typically, plan contributions are tax deferred and the employer makes matching contributions.

Guaranteed lifetime withdrawal benefit
An income insurance wrapper of a participant’s portfolio that provides retirees with a stream of guaranteed-income payments for life if the participant’s portfolio is depleted. A GLWB typically offers income-growth potential, often based on gains from investments in the underlying portfolio, and it typically permits withdrawals or complete liquidation of the underlying portfolio.

Immediate annuity
An annuity that starts to pay income benefits soon after it is purchased, usually within six months of a participant’s retirement.

Inflation risk
The possibility that the future value of an asset will be reduced by economic inflation, weakening its relative purchasing power.

Market risk
The probability that an investor will experience losses from factors that affect investment performance in the financial markets.

Mortality risk
The likelihood of an individual passing away at an age that is earlier than expected and before benefits are fully awarded. In addition, some annuities may end at death, precluding the possibility of transferring the benefits to survivors, resulting in investment loss.

Pension Protection Act
A law signed in 2006 that expanded the provisions of the Employee Retirement Income Security Act of 1974, relating to accessibility and coverage of DC plans and auto-enrollment features.

Plan sponsor
A corporation, nonprofit organization, government agency or other entity that provides a retirement plan to its employees and acts as the plan’s fiduciary.

Portability
The ability of a DC plan participant to transfer a plan benefit or investment vehicle either from one plan to another or between different types of investment accounts.

Record keeper
A DC plan administrator that maintains data and provides a platform for participants to access their retirement plan accounts, access investments, make elections and receive notices, planning advice and education.

Stable value
A portfolio, usually made up of fixed-income investments, that is insured to protect against declines in yield and loss of capital and designed to pay a fixed amount.

VIII

Quiz

Test your knowledge of retirement income solutions based on the information provided in this Guide. It offers a brief recap of key topic areas covered.