Retirement readiness: 7 in 10 employers taking steps to help navigate the transition

A new report from PGIM DC Solutions finds that plan sponsors can do more to personalize defined contribution (DC) retirement plans, in order to better meet the need of Americans once they retire.

“Savings accumulation has been the primary focus for DC plans, but as an increasing number of workers retire with DC accounts, they will be tasked with translating their savings into income,” the new report said. “This will drive demand for better solutions that address the many unique risks that retirees face in retirement.”

PGIM DC Solutions, part of the Prudential Financial group of companies, based the new report on polling from 2022. The researchers surveyed 155 DC plan sponsors that have at least one 401(k) plan and at least $100 million in 401(k) assets. The results were compared to an earlier survey in 2022, with 138 plan sponsors.

Considering new options

The report is based on the fact that a large number of retirees or workers nearing retirement are interested in better ways to turn their savings into income.

“As DC plans continue to evolve from savings vehicles to true retirement plans, retirement income will become a more pertinent focus area for plan sponsors, requiring more research and action,” said Mikaylee O’Connor, senior defined contribution strategist, PGIM DC Solutions. “Plan sponsors don’t need to face this journey alone — they should continue to leverage experts and lean on strategic partners for guidance.”

The survey found that 60% of sponsors had not yet taken steps to increase retirement readiness, steps such as expanding distribution options to allow systemic withdrawals, providing Social Security optimization tools, and determining retirement readiness objectives for plan holders.

“For plan sponsors looking to evolve their DC plans to better support their participants’ retirement readiness, these less-utilized steps can have a positive impact on certain factors, namely, improving participant retirement education and offering more flexible distribution options,” the report said. “These steps are ‘low hanging fruit,’ meaning they should be a lighter lift for most plan sponsors relative to adding new products and solutions.”

Current solutions—and a growing interest in annuities

The study found that about 70% had taken at least some steps regarding retirement income, with Stable Value and Target Date Fund (TDF) plans being the most common solution. The report noted, however, that these funds are not generally designed to address the various risks that retirees face in retirement.

Plan sponsors are also looking more at annuities, which provide a more personalized approach to income during retirement. The study found that 14% of respondents said there is plan participant interest in adding annuities to their plan.

Related: ‘America’s retirement score’ drops: Savers only have 78% of income needed

O’Connor said that plan sponsors often equate retirement income with annuities, so it’s natural they think of that solution. But annuities are not necessarily a perfect fit for the many unique needs that retirees may have, she said. “While I believe it’s prudent for plan fiduciaries to explore annuities (along with other types of retirement income solutions), adoption within the DC system will likely take some time,” O’Connor said. “DC plans have historically been viewed as a savings accumulation vehicle, not necessarily a total retirement solution that addresses the many unique risks that retirees face in retirement. The inclusion of lifetime income solutions broadens the scope for many fiduciary committees, and this takes a shift in thinking, internal buy-in, and education.”

Politicization of ESG funds may be muddying the waters

The report noted that plans with the ESG label (standing for environmental, social, and governance) have become a hot-button issue, in part because of national politics that have some questioning their value.

The report said that plan sponsor views on ESG funds are mixed, with 28% of plan sponsors reporting at least one ESG fund on their 401(k) menu, and 12% offering an ESG target-date fund series. The study found that 36% of respondents said that ESG is not a topic of interest.

O’Connor said that there is confusion around the term ESG, and that maybe it’s time to move beyond the blanket term and pay more attention to the different aspects of such funds. “As an example, a fund that incorporates financially material ESG factors into the investment process is very different from a fund that has an environmental impact objective – yet in today’s world, many people lump these two into the same bucket,” she noted. “Beyond the politics, plan sponsors and advisors should take a thoughtful approach to aligning their goal(s) with the ESG implementation approach. Will offering an ESG fund on the core menu achieve your goal? Particularly given the popularity in default investments. Or does integrating material ESG factors across all the investments in the DC plan better align with your goal(s)?”