Plan sponsors can now ‘best-fit’ retirement income solutions for plan participants
T. Rowe has launched a 5-dimensional (5-D) framework to offer plan sponsors a standard language to understand how different income solutions require participant tradeoffs to meet individual objectives.
Retirement investment firm T. Rowe Price has launched a new, patent-pending framework to help 401(k) plan sponsors evaluate retirement income offerings and quantify which solutions may best fit the individual needs and preferences of their plan participants.
“Much of the retirement income research conducted to date focuses on identifying participant preferences, for example, ‘I want a guaranteed stream of income.’ However, it fails to consider the other side of the ledger, ‘I am willing to give up X% in monthly income’ to achieve that preference,” said Jessica Sclafani, Global Retirement Strategist at T. Rowe Price.
T. Rowe Price’s research team collaborated on developing the framework, recognizing that the industry lacked a common, unbiased method to help plan sponsors evaluate the growing universe of retirement income products. T. Rowe Price’s 5-dimensional (5-D) framework offers DC plan sponsors a standard language to understand how different retirement income products require tradeoffs to meet specific plan participant objectives, at no extra cost.
Investments solutions used during the savings phase are generally evaluated on a 2-dimensional (2-D) basis, focusing on:
- a certain level of return for
- a given level of risk.
This new 5-D framework identifies a wider range of objectives, namely asking more specifics:
- Longevity risk hedge: how many years will retirement savings last?
- Level of payments: what will the amount of annual income be?
- Volatility of payments: how much can “paychecks” change from year to year?
- Liquidity of balance: if a need arises, how much savings can be accessed?
- Unexpected balance depletion: how high is the risk of money running out earlier than planned?
Quantifiable metrics assess how well various retirement income solutions may help plan participants achieve these objectives.
“Given the proliferation of in-plan retirement income solutions post-SECURE Act and SECURE 2.0, we felt that plan sponsors could benefit from a process or framework that allows them to understand how various products are constructed to emphasize or prioritize certain objectives,” said Jessica Sclafani, Global Retirement Strategist at T. Rowe Price
“We are continuously evolving our retirement research and offerings to facilitate choice and personalized solutions that can best fit retirees’ needs …” said Sebastien Page, Head of Global Multi Asset and Chief Investment Officer at T. Rowe Price. “Our team has created an unbiased and uniform model that allows plan sponsors to visualize, compare, and contrast retirement income products.”
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“Thus far, reactions have been positive and the framework has been described as ‘intuitive’ and potentially useful in terms of understanding how to prioritize adding different types of retirement income products to the plan,” said Sclafani.
Most of the retirement income research focuses on identifying participant preferences, said Sclafani. She gives an example: “I want a guaranteed stream of income.” However, she said, it fails to consider the other side of the ledger: “I am willing to give up X% in monthly income to achieve that preference.”
“The 5-D framework examines and quantifies these tradeoffs that are uniquely inherent to retirement income needs,” said Sclafani. “It offers a common method to compare and evaluate retirement income solutions.”