A new paper from Prudential argues the next evolution of savings plans must prioritize generating lifetime income.
The economic volatility wrought by COVID-19 is a wake-up call for the future of retirement savings. The message is especially urgent as it relates to those near the end of their careers or recently retired, as the current crisis has exposed just how much risk has been shifted onto individuals when it comes to addressing their retirement income needs.
Prudential’s new white paper, “America’s Workers Need a Next-Generation DC Plan More Than Ever,” points to the pandemic’s effect on the economy, and notes that those with the least time to recover will likely be affected the most. According to Prudential’s recordkeeping data, many participants have shortsightedly taken steps to try to minimize losses. For example, the overwhelming amount of activity out of equities into stable value and fixed-income accounts in the first quarter of 2020 was completed by individuals between the ages of 55 and 64.
To continue to meet the needs of American workers, retirement savings plans must evolve to address the risks facing pre-retirees and retirees, says Harry Dalessio, head of Prudential’s Institutional Retirement Plan Services. He argues that improvements to the retirement system should address several key realities and opportunities:
- Many workers haven’t saved enough, yet account balances will need to be stretched through their retirement years.
- Workers shoulder a tremendous amount of risk as they near retirement.
- Plan providers have the ability and tools to steer and fix less-than-ideal participant decision-making.
- Everyone retires with a unique set of financial circumstances, but not everyone has access to professional financial advice.
Josh Cohen, PGIM head of Institutional Defined Contribution, adds, “For retirement investment solutions to be successful in providing a secure income in retirement, they must account for the level and types of expenses—both needs, such as housing, and wants, such as leisure travel—faced by retirees. Providing more participant customization can go a long way in improving outcomes relative to the one-size-fits-all strategies that are so popular today.”
Dalessio says the next evolution of retirement savings plans must prioritize generating retirement income, serving retirees similarly to the way a pension plan would.
“401(k) plans were never built or set up to be the primary retirement vehicle for U.S. workers—they were initially intended to be a supplemental savings account. A true retirement plan delivers a steady paycheck and needs to include an income component or a drawdown strategy,” Dalessio said. “Plan design must drive the savings, investment and spending behaviors needed both prior to and during retirement to reduce the likelihood of retirees running out of money. Unfortunately, especially in a turbulent economy, it is fair to wonder how many of today’s workers will be forced to delay retirement because they lacked the income solutions to help protect their hard-earned savings.”
Click here to read the full report, “America’s Workers Need a Next-Generation DC Plan More Than Ever.”