In recent years, both plan sponsors and participants have been increasingly preferring lifetime income solutions within defined contribution (DC) plans. These solutions, such as annuities, provide predictable post-retirement income, making them an attractive option. As retirement planning continues to evolve, lifetime income solutions are becoming the preferred choice for many.
According to LIMRA, approximately half of retirees in the US receive guaranteed lifetime retirement income from a pension and only 15% of private-sector workers have access to a defined benefit (DB) pension plan. Consequently, plan sponsors are actively seeking ways to integrate lifetime income solutions into their offerings to provide employees with financial security in retirement.
Lifetime income solutions provide a continuous stream of payments throughout an individual's life, ensuring retirees do not outlive their savings. These solutions offer predictable and guaranteed payments, mitigate longevity risk, protect against inflation, and provide peace of mind through financial security.
Key drivers for the adoption of lifetime income solutions
- Market volatility: The increased volatility in both equity and fixed-income markets, coupled with high interest rates and inflation, has created greater uncertainty for investors. These conditions underscore the need for solutions that offer more predictable and stable income streams, especially in retirement. Lifetime income products, such as annuities, help mitigate the financial risks associated with market fluctuations, providing retirees with a sense of security even during economic instability.
- Shift from DB to DC plans: Consulting firms are actively implementing inclusive recruitment strategies that target diverse talent pools. Blind recruitment techniques are being utilised to mitigate bias, with diversity prioritised as a key criterion in hiring decisions. These practices ensure equitable opportunities for all candidates.
Distribution of Retirement Plan Types for Families with Active Participant in Employment-based Retirement Plan
- Regulatory developments: Recent regulations have significantly boosted the adoption of lifetime income solutions. The SECURE Act of 2019 enabled 401(k) plans to include in-plan annuities, simplifying the integration of lifetime income solutions into retirement savings. The SECURE 2.0 Act further expanded this access by allowing 403(b) plans to offer in-plan annuities, thereby increasing the availability of guaranteed income options for public sector employees and non-profit workers. These regulatory changes are paving the way for broader acceptance of lifetime income products.
- Life expectancy: According to the US Census Bureau, life expectancy in the US is expected to rise from 79.7 years in 2017 to 85.6 years by 2060. This six-year increase poses a significant challenge for retirees, who need to ensure their savings last throughout potentially longer retirements. As the population ages, concerns about outliving one's savings grow. Lifetime income products, such as annuities, can help mitigate this risk by providing guaranteed income for life, thereby reducing the financial uncertainties associated with longer life spans.
- Participant demand: Interest in lifetime income solutions has surged since the pandemic. According to the 2024 EBRI-Greenwald study, 83% of workers are now keen on using their retirement savings to buy products that ensure a steady monthly income. This shift reflects a growing awareness among employees about the importance of long-term financial security. With the US population aging rapidly (more than 73 million Americans will be 65 years or older by 2030, up 30.3% vs 2020), there is a rising demand for guaranteed income in retirement. Consequently, employers are responding by offering more tailored and flexible lifetime income solutions that meet diverse needs and preferences.
Lifetime income products are continually evolving to better meet participants' needs, with providers introducing innovative and customizable solutions. For example, hybrid products offer both growth potential and guaranteed income. Additionally, providers and participants are increasingly opting for products like target date funds that incorporate income solutions. Providers are also focusing on overall financial wellness by offering education and resources to help participants integrate lifetime income solutions into their retirement planning.
Challenges to Adoption
Despite the growing trend towards lifetime income solutions, several challenges persist:
- Education and awareness: Many plan participants are unaware of lifetime income products and their role in retirement planning. Studies reveal that 16% of plan participants users are unfamiliar with products like in-plan annuities, while only 38% of employers fully understand the SECURE Act provisions that support these options.
- Cost considerations: A significant barrier to adoption is the perceived high cost of annuities. Surveys indicate that 48% of employers cite fees and expenses as the main deterrent to investing in guaranteed lifetime income products. However, 73% of participants would be more inclined to consider these options if offered at reduced costs through employer plans.
- Complexity of options: The variety of lifetime income options, such as fixed annuities, variable annuities, and target date funds with embedded income features, can be overwhelming. Research highlights that 59% of plan sponsors find in-plan retirement income options too complex.
- Fiduciary responsibility: Plan sponsors face the challenge of ensuring that lifetime income products align with the best interests of participants. This involves evaluating product providers, costs, and features while adhering to stringent fiduciary duties under Employee Retirement Income Security Act (ERISA). Many plan sponsors cite fiduciary concerns as a reason for hesitation in adopting these solutions.
Road Ahead
The integration of lifetime income solutions into retirement plans is becoming increasingly important to ensure financial security in retirement. By leveraging technology, enhancing education, and navigating regulatory changes, plan sponsors can more effectively incorporate these products into their offerings and help participants achieve better retirement outcomes.
Recently, several firms have introduced innovative lifetime income offerings:
- Lincoln Financial Group: Expanded its suite of in-plan lifetime income options with the Lincoln PathBuilder Income product, which adds a lifetime income guarantee to an underlying asset allocation investment fund.
- J.P. Morgan: Launched SmartRetirement Lifetime Income, a target date fund designed to help participants generate retirement income.
- Franklin Templeton: Partnered with Pacific Life to enter the DC lifetime income market through a DC-managed account. The partnership will use Franklin Templeton's Goal Optimization Engine to help participants invest in a deferred fixed-income annuity from Pacific Life.
- T. Rowe Price: Announced an in-plan lifetime income solution in partnership with Pacific Life called Management Lifetime Income (MLI). This combines an in-plan managed account payout collective investment trust (CIT) with an option for guaranteed lifetime income via a qualifying longevity annuity contract (QLAC).
How Evalueserve Can Help
Evalueserve's extensive market and competitive intelligence programs offer timely and actionable insights tailored for retirement solutions firms. Our support enables clients to stay abreast of industry trends, regulations, market opportunities, and competitor strategies. We help retirement solutions firms make informed business decisions, such as investing in new opportunities, pursuing mergers and acquisitions, or expanding their product offerings.
Case Study
A Fortune 100 financial services firm, specializing in investment, advice, and retirement solutions, wanted to analyze the in-plan lifetime income offerings of its key competitors. It sought to understand how its competitors were marketing and positioning their products. Evalueserve conducted a thorough analysis of the competitors' offerings to help the client identify gaps in its capabilities along with areas for improvement.
Ask
The client required comprehensive competitor benchmarking for in-plan lifetime income products to identify gaps in its service offerings.
Solution
Evalueserve analyzed competitors' products based on features, income-payout options, liquidity, fees, marketing, and positioning. We created a detailed comparison matrix and provided insights to highlight the strengths and weaknesses in the client's offerings.
Business Impact
The insights from our benchmarking exercise enabled the client to gain visibility into competitors' services, identify differentiators, and realign its offerings to enhance its industry positioning.
