Retirement Income Participant Interest Surveys: A Contrarian View

Retirement income funds can serve an important purpose as a participant investment option for retirement plans. When surveyed, many participants expressed interest in investment options which generate monthly income during their retirement years. While the concept is popular, there are relatively few investors in these plans.

If participants have interest in the plans, why are so few investing in them? Perhaps part of the reason has to do with a misunderstanding about how the funds are actually invested. It’s also worth considering the source of the surveys asking about interest in retirement income funds. A company providing these funds may not be the most impartial when it comes to surveying potential investors in their products. Retirement income vendors have increased marketing efforts for their retirement income product, bolstered in part by employee surveys affirming interest. It is prudent for plan sponsors to look critically at survey conclusions when evaluating potential benefits of any new product for your retirement plan participants.

A survey conducted by the well-known and respected JP Morgan gauged participant interest for a retirement income product which could be meaningful to many retirement plan participants.

The JP Morgan survey conclusions are similar to those of others.1

1.       “There is notable variability in participants’ expected retirement age and style. The mean age when respondents expect to retire is 64.7, with 51% planning a gradual move into full retirement.”

“Notable variability” in participant expected retirement ages is not surprising. Many plans have average employee age well under 40. Younger employees may often hope to retire early without careful evaluation of financial planning targets; some may have done considerable research, while others may just be hoping or guessing. A younger participant may express interest in retirement income funds without having a thorough understanding of what they will need in retirement. With perhaps decades before they retire, the survey results from workers in their 30s and 40s are unlikely to be meaningful for plan sponsors who are considering these funds.

2.       “Most are concerned about outliving their money and unsure about how much they need to save for retirement. Nearly seven out of 10 respondents are concerned about outliving their money in retirement.”

Again, this conclusion is expected and understandable as seven out of 10 (at least) should be concerned about outliving their retirement because they may not be saving enough. For those who have not saved enough, a retirement income fund is not a solution to the problem. 

3.       “Many would welcome a post-retirement income option in their plan. A large majority of respondents (85%) say they would likely leave their balances in their plans post retirement if there was an option to help generate monthly retirement income.”

Again, no surprise here. Most participants would probably agree a lifelong retirement income would be a good thing if it provides a reliable source of income that is enough to fund their lifestyle. However, most may not realize the conservative blend of investments in these funds generates a relatively low rate of return. Even assuming a relatively significant $1 million account balance, the typical retirement income fund would only generate $23,800 in annual income. (https://www.morningstar.com/articles/958275/what-are-retirement-income-funds-do-you-need-one)

At first glance the above survey conclusions may reflect an implied interest by participants for a retirement income option, however evidence of impending substantial deferral commitments is uncertain.

The question becomes how many participants would actually select to defer into a retirement income option, and at what percentage of their total deferral amount? Considering the proliferation of articles on plan interest in adopting retirement income options the actual adoption rate is not as high as expected, and little is available substantiating the significant utilization of these options by participants.

This does not mean these options may not thrive in the future; on the contrary, they may certainly be appropriate for retirement plans. Consider the similarity with auto-enrollment, when first offered, was met with less than tepid acceptance and now it is ubiquitous among retirement plans and for very good reason.

If you have questions regarding your plans post retirement, contact a Trusted KerberRose Retirement Advisor.

Sources

1 Additional JP Morgan survey information can be found at https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/defined-contribution/plan-participant-survey/post-retirement-plans