Helping your employees solve the retirement decumulation challenge
by Heather LavalleeMs. Lavallee is CEO, Wealth Solutions at Voya Financial. Visit voya.com.
I’ve heard friends and former colleagues who have retired describe retirement like this: Every week is like having six Saturdays and a Sunday. And while the thought of long vacations, helping your favorite nonprofit or just spending more time with family and friends is exciting and appealing, there is much that needs to be done financially to begin this chapter of life. No generation is facing this challenge more right now than baby boomers.
A recent NHP Foundation survey reported that approximately 10,000 of the estimated 78 million baby boomers hit retirement age every day.1 Voya research has also found that, on average, workers participating in a workplace retirement plan believe they will need 65% of their current household income in retirement to live comfortably.2
What’s more, an additional Voya survey found that a majority (90%) of Americans think having a guaranteed source of income in retirement is important or extremely important so they don’t outlive their savings.3 It then becomes clear that, for employers and employees alike, the need for lifetime income solutions and “decumulation” (also known as retirement “spend down”) strategies have become increasingly important. In short, a significant number of Americans need help to determine how to make their hard-earned retirement nest egg last for decades.
“In short, a significant number of Americans need help to determine how to make their hard-earned retirement nest egg last for decades.”
The need for lifetime income solutions has more recently led to favorable legislative actions — such as those outlined in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The SECURE Act outlined three major lifetime income-related provisions: disclosures regarding lifetime income; fiduciary “safe harbor” for the selection of a lifetime income provider; and portability of lifetime income options for in-plan lifetime income products.
These steps in the right direction on the part of Congress have helped reduce some of the barriers that have traditionally discouraged the use of lifetime income products and encouraged retirement plan participants to begin thinking about how to turn their defined contribution savings into a lifetime income stream. The SECURE Act is evidence that retirement income is becoming a priority even beyond the plan sponsor and advisor community.
As the discussion surrounding lifetime income and decumulation continues to develop and expand, I would like to suggest three actions employers can take to help their employees address the challenge of decumulation.
Income Solutions Within The Benefits Package
When it comes to the concept of decumulation, there have been few options for individuals, primarily because the concept can be more complex than accumulating assets — for employees and employers. Decumulating assets must be done strategically and effectively to balance not taking too much money out of retirement savings with also allocating enough funds for a retiree to enjoy their retirement to its fullest.
As a result, a comprehensive income strategy should include two broad types of income:
- Guaranteed lifetime income, including guaranteed “paychecks” like Social Security, defined benefit pensions and fixed annuities; and,
- Flexible retirement income, generated by withdrawals from retirement plans and other sources.
No One-Size-Fits-All Income Solution
However, the reality is that there is no one-size-fits-all solution for lifetime income. What works best for one person may not work for another. For example, some employers today are starting to offer annuities inside 401(k) plans to help their employees make their money last into retirement. But while the option to leave dollars in one’s retirement plan might work for some, for others, it might be best to move their funds into another product. Just as employees are provided with multiple investment solutions to begin saving in their defined contribution plan, there should be a variety of options for funding their retirement income streams — including things like a guaranteed annuity or a targeted income spend-down strategy.
Having an array of solutions that are easy to understand and implement enables employees to make choices according to their lifestyle and retirement goals while fostering a greater feeling of confidence and financial well-being.
Education is key to help employees understand how to plan for and transition into retirement. For employers to expand their benefits packages to include retirement income solutions, they must be informed and knowledgeable about how the process and strategies work. This, simply put, is no easy task, but working with a plan consultant, advisor or third-party administrator to provide the right type of education and guidance is paramount.
Once employers understand how retirement income solutions fit within their benefits package, they have to tackle the task of educating their employees on the importance of decumulation as well as how to take advantage of their benefits options to achieve a successful retirement. Voya research shows that 72% of workers are interested in digital tools and advice at work that can help them make decisions about their retirement plan and workplace benefits.4 This suggests that employees would truly benefit from educational resources — including things like online articles, live webcasts, on-demand videos, digital tools and downloadable guides and worksheets — provided by or through their employer.
When it comes to education there’s also an important and growing population within your workforce, like caregivers, who could benefit from broader education. Caregivers in particular may have more difficulty understanding what their future needs will be, so understanding what lifetime income and investment strategies could be available to them is an important consideration.
In the case of decumulation, it is also important for employees to understand the decisions that they have to make prior to retiring to ensure a smooth transition into a fully funded retirement. Employers might consider providing access to a retirement plan advisor as part of their retirement package offering — one who can help educate and support employees with their planning needs. Employers have an opportunity to provide holistic guidance to pre-retirees as they consider their assets, both inside and outside the workplace, to develop strategies for transitioning their retirement savings into an income stream — while also balancing withdrawing from multiple savings accounts with required minimum distributions and maximizing Social Security benefits.
Start Simple, With Room To Evolve
It goes without saying that the challenge of decumulation is complex and, like many retirement planning topics, is unique to each individual. For employers, it will take time and consultation to find the most effective ways to expand their retirement package to include a lifetime income solution. But expanding retirement benefits not only helps near-retirement employees address the decumulation challenge, it also demonstrates to all your employees that you are truly focused on all of their health and wealth needs, regardless of age, income or size of assets. The benefit? Nearly half (48%) of workers say they are more likely to stay with their employer if they are offered help converting savings into income for retirement5, this positioning can only help to attract and retain talent of all career levels.
It goes without saying that the challenge of decumulation is complex and, like many retirement planning topics, is unique to each individual.
Incorporating innovative solutions that enable employees to transition into retirement with a greater feeling of security has the potential to positively frame a company as a benefits leader that cares about the well-being of all of its employees. Having the most comprehensive solution immediately available might not be your goal, so starting with solutions that fit within your solution set, or expand a current benefit, is a great place to start. And doing so now — when the names of each day of the week are still different — can achieve much in terms of helping your employees achieve their financial wellness goals with confidence.
1. “Boomers Unprepared for Looming Retirement” housing survey, NHP Foundation, March 2018.
2. & 5. Based on results of a Voya Financial survey conducted through AYTM – Ask Your Target Market online research platform between Jan. 18–26, 2021, among n=750 Americans age 18+ who are full-time employees and actively contributing to their employer-sponsored retirement plan, balanced by age and gender to reflect the U.S. population.
3. & 4. Based on the results of a Voya Financial survey conducted through Ipsos on the Ipsos eNation omnibus online platform among 1,005 adults aged 18+ in the U.S., featuring 499 Americans working full-time or part-time. Research was conducted June 3-4, 2021.
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