Biscuit has three bowls. Now he needs to decide how to fill them.
By the end, you will be able to
- Recognize components of each of the three categories and their importance to both plan sponsors and participants.
- Explain why most people want a combination of guaranteed and non-guaranteed income.
- Distinguish distribution options, a plan design decision, from investment options the committee must select and monitor.
- Use a decision tree to apply structural plan choices to narrow the field of lifetime income solutions.
- Weigh both the plan’s preferences and how everyday participants like Mittens are likely to behave.
- Respond to common objections from plan sponsors.
Fur Fetched, Inc.
Fur Fetched, Inc.
Biscuit helps his owner make the plan’s decisions. He is joined by Mittens, the Senior Toy Tester at Fur Fetched, Inc. Mittens is focused on her job, not the retirement plan. She’ll give Biscuit perspective on the benefits and what’s important to her.
In Module 1, Biscuit identified the three categories of retirement income. At Fur Fetched, Inc., he now has a harder question: which solutions fit, what are the pros and cons, and how does a committee decide how to fill those bowls? This module does a deeper dive into each category. Here, Biscuit spends more time on guaranteed lifetime income because there are so many new products and questions around annuities. But not to worry: he also provides a framework a committee can use to narrow the field.
Each category does a different job for participants.
Tap each bowl to see the job it does. Every category of retirement income is valuable in helping workers achieve their retirement goals. A plan doesn’t need to have them all, but it does need to develop a strategy and actively make a decision, even if that decision means not filling one of the bowls.
Often the easiest place to start.
Education and planning help participants plan for retirement and learn about the decisions they’re going to have to make. This is often the easiest category for a sponsor to enhance and doesn’t involve any investment decisions.
Flexibility, without a guarantee.
These solutions help participants take out money in a structured way while giving them full access to their money. An essential component of any plan that doesn’t just want participants to roll their money out at retirement. At the core are distribution options, but some involve investments that the sponsor selects.
Flexible distribution options
Participants choose how and when to take money out of the plan, for example in installments instead of one lump sum.
Systematic or dynamic withdrawals
Systematic withdrawals pay a set amount on a set schedule. Dynamic withdrawals adjust the amount over time, for example as markets move or spending needs change.
Managed payout funds
Funds that stay invested while maintaining a payout strategy. These may last until a certain age or date and nothing is guaranteed.
Retirement-focused target date funds
Target date funds built for the retirement years, so participants stay in a fund they already know as they start spending.
The bowl that doesn’t run out.
Guaranteed lifetime income from an annuity is insurance that directly addresses longevity risk. Sponsors should decide if this is important to their strategy and then look at how. It may be easier than they think.
Most people want both a paycheck and flexibility.
Most prefer a combination: a base of steady income boosted by withdrawals that offer flexibility. Offering both makes sense, but some solutions involve investment decisions and others do not. We’ll walk through a process to match solutions to the plan’s preferences.
Bowl 2: Distribution strategies and investments
Bowl 3: Guaranteed lifetime income
Bowl 2 only
Participants have automatic payments and control, but they still have to deal with uncertainty.
Bowls 2 and 3 together
Guaranteed payments provide a reliable paycheck, while the rest of the savings stays flexible for spending and surprises.
Bowl 3 only
Certainty is great, but now participants have to worry about changes and the unexpected down the road.
Let’s look at distribution strategy and investment decisions.
This activity focuses on distribution strategies and investments. Some of what a sponsor adds here is a plan design choice. The rest is an investment the committee must select and monitor. More sophisticated strategies may be available within a managed account. Tap a solution, then tap its category.
Simplifying decisions about lifetime income
Fur Fetched, Inc. doesn’t offer an annuity today and Biscuit’s owner doesn’t know where to start when it comes to finding the right fit for the plan. This framework is a tool the committee can use to narrow the field and make sure a product search finds the right solutions. The decision tree puts the plan’s structural preferences to work alongside the plan’s other objectives. Product decisions come later.
Three questions sort the lifetime income options: When, Who and How.
The decision tree sorts the lifetime income options. It starts with structure, not products. Work from the top down: each choice limits the next, so only workable paths are open. Then see how your path fits both the plan’s preferences and Mittens’ behavior.
When is income offered: while saving, or at retirement?
The first structural choice is timing. Income features can be built in while participants are still saving, or offered when they retire.
While participants save
Income features are part of the plan while participants save.
- Can be part of the glidepath to retirement
- Key decisions left for retirement, when the decisions can best be personalized
- Adds another element to investment selection for the committee
- Enables participants to plan for income, not just savings
At retirement
Participants decide when they leave and are ready to turn savings into income. Always optional: no one is defaulted into income after they retire.
- An option for participants that use self-directed investments, even when the default includes income
- Simple annuity features that may complement another product
- Participants may use a solution that sits outside the plan’s investment lineup
- Some options require no recordkeeper integration
Who chooses: the sponsor, or the participant?
The second structural choice is who makes the selection. This is where the plan’s preferences and everyday behavior meet most directly.
Default (the sponsor selects)
The committee chooses the solution and who receives it.
- Reaches participants who never engage
- Only possible while participants save
- To meet company objectives, greater participation may be required
- Participants should still understand their options
Optional (the participant selects)
Each participant decides whether to use the solution.
- Respects individual choice and circumstances
- Used mainly by engaged participants, often those with greatest savings
- Depends on good education and an easy path to elect
Optional (the participant selects)
Each participant decides whether to use the solution. At retirement, this is the only choice: no one is defaulted into income after they retire.
- Respects individual choice and circumstances
- Used mainly by engaged participants, often those with greatest savings
- Depends on good education and an easy path to elect
How is income delivered?
The third structural choice is the vehicle. Switch between the two timings to see the products that fit each one. Each product changes who sees it, how it feels to participants and what the committee has to evaluate.
In a target date fund
Income features are built into the fund participants already hold.
- Uses a familiar investment format
- Works with a default or as an optional choice
- Participants may not need to do anything new
In a managed account
Income is part of a personalized managed account service.
- Can offer personal guidance
- Works best when participants are enrolled or engaged
- Often includes an added fee for the service
Standalone annuity option
Participants select an annuity option on the investment menu on their own.
- Gives the committee flexibility in product choice
- Participants must find it and choose it
- Can only be optional, because it cannot be a default
Annuity purchase (such as a SPIA)
Participants buy an annuity directly when they retire.
- Income starts when the participant decides to convert savings
- The plan may help participants find and understand providers
Annuity platform (to buy an annuity)
A platform helps participants compare annuity offers from insurers.
- The committee evaluates the platform and the insurers it offers
- Participants still decide, so education and support matter
Choose the When, Who and How for each sponsor.
Read each sponsor’s situation, choose one option in each row, then check your structure.
Structure narrows the field before anyone studies a product.
- If the plan doesn’t want a default, skip products that only work as defaults.
- Plan structure narrows the field to a handful of products, so no annuity expertise is required to begin.
- So far the framework has worked for any retirement income solution. Next we zoom in on bowl 3, where there are many new products and the most questions. The next module covers the two main ways to deliver it.
Match each objection with the reality.
Sponsors raise the same four worries again and again. Tap an objection, then tap the response that answers it.
A strategy can use all three categories.
Categories are not either-or. A plan can put solutions from all three in place together or add them over time. Plan a strategy for Fur Fetched, Inc. by choosing when each bowl gets filled, with both the plan’s preferences and Mittens’ behavior in mind.
Identify the strategy first. Then look for options within each of the categories.
Next up is the quiz. Ten questions, 80% to pass, and you can retake it.