Practice Management
While most employees plan to rely on 401(k) savings to be their largest source of retirement income, only a small portion are confident in their ability to generate a retirement income strategy and most worry they will run out of money in retirement, a new survey finds. In fact, findings from Invesco’s survey of more than 1,000 retirement plan participants and 100 large plan sponsors reveals that only 22% of employees said they were “very confident” they could develop a retirement income strategy on their own. Moreover, nearly 7 in 10 employees fear running out of money in retirement, including those with higher incomes, who work with an advisor or have a defined benefit plan.
The firm’s annual 2022 defined contribution (DC) research — Show Me the Income — further reveals that employees say they would stay in their DC plans if they focused more on retirement income, but are unaware whether that is an option.
“With research showing that almost 70% of employee respondents are worried about running out of money in retirement, it’s vital that employers help them overcome that fear, bridge the gap with retirement income options and education,” says Greg Jenkins, Managing Director and Head of Institutional Defined Contribution at Invesco.
“Nearly 9 in 10 employees would be more likely to stay in their plan if it were able to generate a regular income stream in retirement — yet almost one third of participants were unaware that staying in the plan after retirement was even possible — highlighting the need for improved communication,” adds Jenkins.
The survey found that 78% of employers said they provided communications and/or education about turning retirement savings into a regular stream of income, yet only 38% of employees remembered receiving these types of communications. And almost half of all Baby Boomers (48%), Gen Xers (44%) and Millennials (46%) said they hadn’t received any communications on the topic.
Plan Options
To help employers navigate the transition from savings to income for their respective plans, the research looks specifically at (1) factors that would keep employees in their plan when they retire, (2) how employees perceive guaranteed lifetime income and non-guaranteed monthly income withdrawals solutions, and (3) their views around auto-enrollment into an income solution.
According to the findings, employees would be more likely to stay in their current employer’s plan if:
- there were specific investments available designed to help them create a stream of income in retirement (89%);
- the costs were lower than they could get elsewhere (87%); and
- they could roll other retirement money into the plan for a consolidated view of their savings (84%).
Employees also indicate that they want a consistent, monthly income stream that covers their baseline expenses and includes the flexibility to withdraw additional amounts as needed. To that end, nearly all (94%) employees viewed guaranteed lifetime income as a good fit for them, but 84% believed that non-guaranteed monthly income withdrawals are the best option and 88% preferred a split option between guaranteed lifetime income and non-guaranteed monthly withdrawals.
At the same time, however, while employees liked the concept of guaranteed income for life, the idea of “locking it in” — not (1) being able to make any changes (92%), (2) having access to larger amounts if needed (90%), or (3) controlling how the money would be invested (79%) — were key disadvantages, Invesco found.
Employers view the potential for additional fiduciary risk to the plan, higher costs and a participant’s inability to access larger amounts as needed as top disadvantages. That said, 92% agreed that even if a small percentage of employees take advantage of a guaranteed lifetime solution it’s still worth offering.
Auto-enrollment
Meanwhile, employees also indicate that they would welcome auto-enrollment into a retirement income solution. To ease the uncertainty around retirement income and combat inertia, 80% of employees favorably viewed automatic enrollment.
Participants who had been automatically enrolled into their plan had the most positive view (93%). By generation, Millennials had a more favorable view than Baby Boomers (83% vs. 75%), along with those with income less than $100,000 (83%). Overall, employees had various reasons for welcoming auto-enrollment:
- 58% liked the idea of a consistent monthly payment;
- 44% felt it made the choice easy; and
- 40% liked that they won’t have to pay a financial advisor to manage this money.
“Quite simply, we found that employees want their employers to start the retirement income conversation — specifically on how to turn their DC plan savings into an income stream in retirement,” Jenkins further emphasizes. “To ensure employees are not only prepared for retirement, but provided with income throughout, it is crucial that employers look at a range of tools and income solutions and consider early, more frequent educational support to help employees have a smooth transition.”
Together with Greenwald Research, Invesco conducted the 10-month study from March through December 2021, spanning online surveys of 100 plan sponsors and more than 1,000 plan participants (working for U.S. employers with 5,000 or more employees), 12 participant focus groups, eight in-depth interviews with plan consultants and advisors, and nine in-depth interviews with large plan sponsors.
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