The Real Reason for Slow In-Plan Retirement Income AdoptionThe Real Reason for Slow In-Plan Retirement Income Adoption

For decades, well-funded providers have been declaring that the time is now for retirement income in defined contribution plans, and now we have “figured” out the accumulation phase through the ideal or auto plan. Yet adoption is still tepid despite large providers like Allianz, TIAA, American Century, State Street, BlackRock and Fidelity leaning in.

Why?

There are three reasons that create massive change in the 401(k) and 403(b) industry:

Target date funds were created in 1993 by Larry Tint and Donald Luskin at Wells Fargo Investment Advisors, later acquired by Barclays Global Investors and eventually BlackRock. By 2006, there were $237 billion in TDFs, which ballooned to $3.8 trillion in 2024, certainly not because clients were asking for them – most plan sponsors and participants did not even know what they were. The growth of TDFs was the result of the 2006 Pension Protection granting safe harbor for the use of balanced funds as the default option for plans deploying auto features.

Most participants always needed to use professional investment management as the retirement industry morphed from defined benefit to defined contribution plans, but it took legislation fueled by revenue opportunities. DB plans use sophisticated investment managers and guarantee income for life, but a cost most organizations are unwilling to pay – liability. DC plans have shifted the liability to participants, and even if they have saved enough, they are ill-equipped to create a guaranteed income plan other than buying annuities if they do not have a personal wealth advisor or financial planner creating a customized plan that must be constantly tweaked.

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The ideal plan helps participants accumulate assets but leaves them to their own when they retire. More climbers die on the way down from Mt Everest—creating income in retirement is much more complicated than saving for retirement. However, before we try to customize solutions for each participant, maybe we should start with one, just like traditional DB plans.

This week’s LinkedIn poll asked why in-plan retirement income adoption has been so slow. The main reason cited was a lack of understanding. Like so many things, the DC industry has failed to bridge the gap between need and the product or service, just like with TDFs before the 2006 PPA. Hearing how retirement income or even annuities work can make normal people’s heads explode, which only makes the industry try harder and talk louder, mansplaining to the uninformed masses.

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Retirement income is the missing piece that turns the ideal plan focused on accumulation only into the “perfect plan” creating a synthetic pension with limited plan sponsor liability. There is no need to explain further, though advisors and consultants will want to help clients pick the best plans for them and their participants just like they did with TDFs. We already have the vehicles to provide income either through TDFs, which are 60-70% of new contributions, as well as managed accounts, which are even better as they can be customized and used to provide advice at scale with engagement with revenue opportunities for advisors and record keepers.

There are still issues including record keeper transferability and loss of control over assets when annuitized as well as cost and limited revenue for advisors and providers all of which can be easily overcome with demand. And like financial advice, most participants do not have enough assets for retirement income to make sense but 10-20% have the majority of the money. There is no lack of talent, innovation and technology focused on these issues.

It is hard to trust research by retirement income providers, which always come to the same conclusions, which is why initial efforts by think tanks like the Milken Institute are so important as they outlined the need and issues in a recent whitepaper, Enhancing Retirement: Advancing Lifetime Income for All. Milken’s Lifetime Financial Security program gathers information about products and relevant research, calling for refined safe harbor and greater education, especially regarding a new asset class.

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Yet, as one of the authors, Cheryl Evans, admitted, it’s hard to engage with plan sponsors, never mind participants. While income for “all,” as the title suggests, might be a noble goal, sometimes we must take small bites before trying to eat the whole elephant.

So let’s declare that we have reinvented the pension plan, moving from the “ideal plan” to the “perfect plan,” which includes income-creating synthetic pension plans with a new class of TDFs or within managed accounts to overcome any plan sponsors' concerns and lack of understanding of who can use it to attract and retain the best workers, just like they did with the old and not defunct DB plans but without the liability.