Understanding and Evaluating Retirement Income Solutions

With nearly 4.2 million Americans reaching age 65 this year—the most ever—retirement plan advisers and sponsors are no longer able to ignore or put off the need to provide retiree and near-retiree participants with options to begin drawing down the income they have spent decades saving.

Last year, about 20% of 500 C-suite leaders surveyed by TIAA said that offering guaranteed income for life was the top way that employers could improve workers’ retirement. But plan sponsors have an additional incentive to provide such solutions: Doing so makes it easier for them to retain retired participant assets and maintain their scale. Amid market turmoil, some plan sponsors are also turning to annuities as a potential replacement for bond funds in the fixed-income portion of portfolios.

“Retirement income is complex, and plan sponsors can benefit from a trusted partner to help them sort through all of the products coming to market,” says Jessica Sclafani, a global retirement strategist at T. Rowe Price. “We are seeing plan sponsors that don’t work with a consultant or adviser on retainer are considering engaging one for a retirement income project.”

Since the Setting Every Community Up for Retirement Enhancement Act passed in 2019, giving plan sponsors safe harbor to offer in-plan annuities, plan sponsors have been slowly adopting such products, which typically carry lower fees than out-of-plan options.

“I expect we’re probably only a few years out from all recordkeepers having at least one, if not a few, lifetime income solutions available,” says Phil Maffei, TIAA’s head of corporate retirement strategic partnerships and sales enablement.

Array of Products

Plan sponsors are not the only ones focused on guaranteed income. As market volatility and higher inflation have contributed to worsening retirement outcomes, more participants are also looking for access to retirement income solutions, says Nick Nefouse, BlackRock’s head of retirement solutions and the global head of LifePath.

The growing interest from both plan sponsors and participants has led to an ever-growing array of income solution products from which to choose. As with any plan design change, that requires due diligence.

“Plan sponsors should consider the investment outcome, ease of implementation, cost-effectiveness and participant education when integrating retirement income solutions,” Nefouse says. “Ensuring that the solution aligns with the plan’s overall investment strategy and provides clear communication about the benefits and options available is crucial.”

Sclafani says it is important for plan sponsors to consider the trade-offs that come with any retirement income solution.

“For example, if the product offers a guaranteed income component, what does that mean for liquidity or the participant’s access to their savings?” she says. “Alternatively, what are the fees associated with offering a guarantee? None of these characteristics are inherently good or bad, but it’s about understanding what the product is giving up on to be able to offer something else.”

Bringing annuities into plans allows plan sponsors and their advisers to create tailored communication and education content to help participants understand the product. In addition to providing stand-alone annuities in their investment lineup, recordkeepers and other providers have been leaning into target-date funds with embedded annuities to deliver income to participants through a vehicle with which they are already familiar.

Since launching in April, BlackRock’s LifePath Paycheck has grown to $16 billion in assets under management, as of the end of last year. Meanwhile, TIAA and Nuveen’s target-date lifetime income strategies recently surpassed 1 million accounts and had $50 billion in assets at the end of 2024.

Introducing RILAs

In March, researchers at the Pension Research Council at the Wharton School of the University of Pennsylvania published a paper sharing another option for plan sponsors to consider: embedding registered index-linked annuities into target-date funds. The paper suggested that RILAs, which are linked to equity indexes and which offer partial downside protection with an upside cap, might be cheaper to managed than TDFs and deliver higher risk-adjusted value.

“That’s a very viable structure,” says Frank O’Connor, the Insured Retirement Institute’s vice president of research. “It makes a lot of sense, and it’s a fire-and-forget type of thing for the participants.”

Annuities are not the only option for plan sponsors looking to offer income solutions to their participants; others include managed payout funds and systematic withdrawals. While these do not offer the same guarantee as annuities, they give participants greater control over their assets.

The best solution for each employer will depend largely on the demographics of its plan participants. For example, defaulting participants into annuities might not be the optimal route for plan sponsors whose participants have mostly low balances in their 401(k) accounts or for plans with primarily younger participants or a transient workforce.

Non-Guaranteed Options

Some plan sponsors simply are not sold on the complexity of or costs associated with some guaranteed income products. Such sponsors may instead be focused on nonguaranteed solutions, particularly as a default, and then planning to revisit guaranteed solutions in future years, says Jeremy Stempien, a portfolio manager and strategist at PGIM DC Solutions.

“We think that guaranteed income probably makes the most sense in more personalized solutions, like managed accounts, for example, or some form of advice,” Stempien adds.

Regardless of which solution plan sponsors choose, they will need to vet their providers and provide targeted education to participants.

“You want to make sure you’re offering really good education materials and guidance through your plan provider to educate your participants about how the solutions will benefit them and how they should be thinking about allocating to them,” O’Connor says.

More on this topic:

	What to Know About Adding Income to a Plan Lineup
	Does the 4% Rule Still Stand?
	Comparing Insured and Non-Insured Payout Options
	Beyond the Annuity Puzzle: Rewiring the Psychology of Lifetime Income