Drawdown Decisions: Helping Participants Navigate Retirement Income
As more plan sponsors adopt retirement income solutions, they must consider awareness and education programs to engage participants, as well as how automation can help ease the experience. In this article, we share ways sponsors can help savers navigate the now (the accumulation phase) and later (the decumulation phase) of their retirement journey.
Our conversations with clients and industry peers across the globe have revealed a common theme: The key to participation in retirement income solutions lies in making the solutions feel simple to understand and use.
Learning from the past The array of choices within a defined contribution plan – from contribution levels to investment options – can be overwhelming. Without proper education, participants may make decisions that aren't aligned with their long-term goals, potentially jeopardizing their retirement readiness. Or they may feel overwhelmed and unsure, and so they do not engage at all.
As the defined contribution landscape has evolved, so too have solutions that address barriers to saving and investing for retirement, from the passage of the Pension Protection Act in 2006 (PPA) and the introduction of the Qualified Default Investment Alternative (QDIA), to features like auto-enrollment and auto-escalation (automatic annual contribution increases). As a result, 401(k) adoption has increased. By helping participants simplify their retirement savings during the savings and growth phase, both the Defined Contribution industry and legislation like the SECURE Act and SECURE 2.0 Act are helping Americans save more than ever before.
But to date, the same hasn’t happened as extensively on the drawdown phase. Fiduciaries and asset managers now need to solve for helping participants think about how they will take income in retirement through innovations in plan design and features, communicated through better and wider-ranging education.
In this video, Danielle Gladstone, our Head of Participant Engagement, shares best practices of designing and implementing an effective retirement income participant engagement program.
We leverage our global scale and depth to identify industry trends and we’re seeing exciting developments and innovations– both in terms of design from asset managers and participant outreach from plan sponsors.
Targeted outreach: When it comes to retirement plan communications, it’s important to meet employees where they are. To achieve greater efficacy, sponsors should consider segmenting communications to reach certain demographics with relevant, targeted messaging.
For example, as employees near retirement age, they become more likely to engage with their plan. To some degree, this shift is inevitable: Something that will happen in five or 10 years is more likely to grab your attention than something that will happen in three decades or more. Participants over 50 may be more receptive to detailed information about retirement income solutions and education around the options being made available in the plan.
However, the earlier participants begin saving and planning, the better their chances of meeting their retirement goals. Retirement income may seem like a remote prospect to a 30-year-old employee, but just putting the topic on their radar can increase the probability of participant engagement. With the younger group, sponsors could design interventions that focus on the importance of saving early.
Sponsors should also be strategic about the mediums they use to reach different groups of participants. Some employees prefer print materials, while others are more likely to engage with digital resources – the latter being particularly useful for streamlining decision-making and steps to take action. Also keep in mind that when a communication is intended to drive a major decision, such as choosing a retirement income solution, it often helps to incorporate one-on-one human interaction.
Robust education: Participant education should explain drawdown strategies in simple terms, highlighting the importance of planning for longevity, inflation, and market risks, and participants can now receive personalized lifetime income illustrations in annual benefit statements.
In addition, holistic tools are emerging to help educate and guide participants through the process of modeling income and selecting various features. Webinars and workshops can offer an immediate, impactful experience that allow participants to ask questions in real time. Participants may also benefit from an in-person or virtual appointment to talk through the decision with a financial advisor or other employer resource. As we found with our 2023 Global Retirement Reality Report (GR3), “81% of global respondents believe in the value of one-on-one financial advice from trusted professionals. And, nearly 80% of respondents globally agree that education—such as web-based modeling tools that help determine how to translate retirement savings into lifetime income—would be a helpful retirement resource.”
Consider automation: The complexity of retirement savings and pension plans were among the top concerns impacting respondents’ confidence that they will be ready to retire when they plan to do so, according to GR3. Roughly one in four respondents cited the complicated tangle of employer, government and personal retirement funds eroding confidence in their ability to retire on time.
On the accumulation side, auto-enrollment and auto-escalation have done wonders in increasing participation by leveraging inertia to effectively do for participants what they might not otherwise do for themselves (pick investments and contribute). If, absent auto features, participants struggle with accumulation, it can be extrapolated that they’re going to have trouble determining a sustainable and effective decumulation strategy. In fact, 76% of participants said they would value an employer solution that provided predictable income1. Many don’t know how long they’re going to live or how to sustainably draw down their savings in retirement; one in three retirees who took a lump sum from a DC plan depleted it, on average, in five years2. As decumulation solutions continue to gain traction, incorporating them as the industry did accumulation auto solutions – as the default or as an opt-out option – may yield similar outcomes for participants who would benefit from a “do it for me approach”. Simply put – engagement tactics aside, history suggests that the best way to drive participant outcomes is through automation.
As the backbone of many Americans' retirement strategy, DC plans such as 401(k)s are pivotal to financial security in later life. However, the success of these plans hinges on more than just offering them—it requires informed and engaged participants. Plan sponsors can play a crucial role in helping participants and employees plan for their post-retirement income strategy by leveraging the tactics that have been successful on the accumulation side, and educating participants while they’re still saving.