Spending in Retirement
Understanding expenses in retirement and the idea of using a “Needs and Wants” framework for designing income-oriented investment solutions.
In today’s environment, the growing reliance as a primary retirement savings vehicle, default-driven behavior, and increasing fiduciary scrutiny continue to characterize the DC landscape.
Given these trends, we’ve identified the five key areas plan sponsors and their advisors should focus on to help participants meet their retirement liabilities and manage key risks.
The paper addresses the answers and the lingering questions plan sponsors have about plan design, public policy, investments, default options, and post retirement.
Plan design is critical to helping participants meet their retirement liabilities and it drives participant behavior. Since the Pension Protection Act of 2006, default-driven plan design has become prevalent as plans have adopted features such as automatic enrollment, automatic escalation, qualified default investment alternatives and re-enrollment.
Whether it’s tax reform, fiduciary rules, class action lawsuits, or a safe harbor for retirement income, what goes on in Washington and the courts has a major impact on plan sponsors’ actions related to benefit plans and thus, their employees’ ability to meet their financial goals.
To help participants meet their long-term goals, plan sponsors will need to take more of an institutional approach to investment menu design. This includes offering more streamlined options while also expanding investment coverage to diversifying asset classes and strategies.
With the majority of new cash flows going into the plan default option, the success of these strategies is directly tied to the success of participants in meeting their desired long-term outcomes. Strong acceptance of auto-features and re-enrollment following the Pension Protection Act of 2006 have reinforced the importance of the Qualified Default Investment Alternative (QDIA), making it the focus of sponsors and advisors going forward.
The focus up to this point in the industry has largely been on helping individuals accumulate sufficient assets to achieve their retirement goals. However, this is solving for only part of the challenge as participants will be faced with new risks in meeting their retirement spending needs.
PGIM does not establish or operate pension plans.