6 ways employers can help employees transition their retirement savings to income
Discover opportunities and solutions to help your employees transition their retirement savings into retirement income. Learn actionable steps employers can take today.
The concept of what it means to retire is changing. This evolution is being driven by the soaring number of baby boomers approaching and entering retirement and by shifts in the workplace caused by the COVID-19 pandemic. In either case, the traditional concept of retiring from work at a target age is being replaced by a more transitional and fluid model that runs the gamut from early retirement to delayed retirement to partial or phased retirement. But regardless of how employees define retirement, or when the process begins, every retiree needs reliable income.
Employers have an opportunity to help pre-retirees transition their retirement plan savings into an income stream—including guaranteed income—by offering solutions that are easy to understand and implement. In turn, employers can help pre-retirees have a greater feeling of confidence and financial well-being.
Shifting from accumulation to income
Over the past several decades, the retirement plan industry has regularly introduced new ways for participants to accumulate assets and become more comfortable managing their long-term retirement accounts. While helpful for growing retirement account balances, most plan services and investment menus typically fall short on providing income-generating options.
Shifting perspectives, along with favorable legislative actions, are motivating employers to consider adding retirement income solutions to their defined contribution plans. The SECURE Act highlighted the importance of income solutions and included three provisions designed to increase the availability of lifetime income options in DC plans:
- Fiduciary safe harbor for sponsors selecting an in-plan annuity/income product and provider
- Portability of lifetime income options to help make those options more appealing to participants
- A new lifetime income estimate disclosure requirement that highlights the reality and importance of lifetime income for participants
A recent Voya survey found that 86% of plan sponsors agree that the SECURE Act has encouraged them to adopt a focus on retirement income in their plan design.1
The key components of a retirement income strategy
Retirement plan participants and sponsors need a plan—not just a product. Voya believes that there is no one-size-fits-all solution. Comprehensive solutions that bring together recordkeeping, investments, technology, communications and risk management will best serve participants nearing or in retirement. A comprehensive income strategy should include two broad types of income:
- Guaranteed lifetime income provides reliable retirement “paychecks” that are protected against investment risk and guaranteed never to run out for the participant (and sometimes even their spouse or beneficiary). Sources include Social Security, defined benefit pensions, and fixed annuities*.
- Flexible retirement income is generated by withdrawals from retirement plans and other sources. Depending on how the accounts are invested, there is the potential for investment growth to help extend the length of time the money is available and to keep up with inflation, as well as the flexibility to alter payment streams to accommodate changing goals and needs. These payment streams are not guaranteed by the government, insurance companies or employers, and there is also the potential for these accounts to decrease in value.
Two income streams flow together
Combining lifetime and flexible income sources provides a balance between certainty and flexibility
1. To cover essential expenses (Lifetime income)
- Social Security
2. To cover discretionary expense (Flexible income)
- Retirement plan withdrawals
- Nonretirement savings and investments
- Other sources
Combined retirement income stream = Lifetime income + Flexible income
Plan design features can help generate retirement income options
Working with a plan’s financial professional, consultant or third-party administrator, plan sponsors can add optimal plan design features and income-oriented investment options to support workforce demographics. As the next phase in plan design evolution, a few key features that can support employees as they transition from accumulation to income include:
- Systematic withdrawals—allow retirees to create an automated income stream through simple and convenient withdrawals.
- Expanded investment lineup—includes income options for retirees, such as managed accounts, in-plan annuities and managed payout funds, which are strategies designed to produce steady monthly income payouts.
Participants age 60 or over were 33% more likely to keep assets in their retirement plans after they retired if their plan offered retiree-friendly payout benefits like systematic withdrawals. 2
- Intelligent withdrawal solutions—includes options that integrate a diversified multi-asset fund that balances growth and stability with a technology interface to help retirees create automated income streams specific to their needs and preferences.
- Qualified Default Investment Alternatives (QDIAs)—default participants age 50 or over into investment options such as managed accounts, or similar, that will help support their transition from accumulation to drawdown.
- Rollover in—allows employees to more easily consolidate assets from prior employer plans to simplify account management and make it easier to calculate withdrawals and required minimum distributions.
- Partial distributions—allow retirees more income flexibility by leaving some assets in the plan and transferring a percentage of assets to outside accounts.
These plan design features will help give pre-retirees and retirees reasons to keep their money in the plan rather than taking it all out in a lump sum, which can help maintain the economies of scale the plan attains based on total plan size.
6 ways employers can help employees transition their retirement savings to income
Now that the SECURE Act has provided sponsors more flexibility around retirement plan income options, including a fiduciary safe harbor for in-plan annuities, savvy employers can better help create reliable lifetime retirement income. And employees are looking to their employers for guidance.
At Voya, we will strive to continue to roll out innovative retirement income solutions that offer our clients the ability to tailor strategies based on the unique needs of each employer’s plan and employee demographics. Some steps employers can consider taking now:
- Work with a plan consultant, financial professional or third-party administrator to understand how retirement income solutions fit within your comprehensive benefits package.
- Communicate retirement savings balances in the context of estimated monthly retirement income.
- Offer and promote pre-retiree educational tools and resources to help employees understand how to plan for and transition to and through retirement.
- Optimize the plan to accommodate retirement income by ensuring it allows for partial distributions and systematic withdrawals for maximum flexibility.
- Accommodate the different needs of transitioning employees by adding a variety of retirement income options to the plan investment lineup. This can make it more attractive for retirees to keep their assets in the plan.
- Start with a simple solution today and evolve plan options and default solutions over time.
Learn actionable ways to help your employees transition retirement savings into retirement income.
1 Based on results from 339 online interviews with Plan Sponsors completed by Voya IM in partnership with Brookmark Research in mid-February to early March 2021.
2 Voya Internal Summary data, May 31, 2021. Note: many factors could have contributed to these results.
* Guaranteed income from a fixed annuity is based on the claims-paying ability of the insuring company. Annuities may be subject to additional fees and expenses, to which other tax-deferred funding vehicles may not be subject.
This information is provided for educational purposes only. Each plan must consider the appropriateness of the investments and plan services offered to its participants.
All investing involves risk, including the loss or principal. There is no guarantee an investment, investment strategy, or managed portfolio will meet its stated objective.
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