How to Establish Better Decumulation Options for Future DC Plans

Defined contribution leaders from TIAA weighed in on the evolving needs for lifetime income solutions, new policy horizons and changing plan sponsor attitudes during a session this week at PLANADVISER 360 in Scottsdale, Arizona. The panelists said the retirement industry should be setting the stage for potential innovation, even without immediate regulatory changes.

Tim Pitney, TIAA’s head of lifetime income default sales, addressed lifetime income in retirement plans and pointed out that while the government has historically supported industry advances—such as the Pension Protection Act, which spurred target-date fund popularity—many of today’s challenges do not require regulatory intervention.

Pitney said plan sponsors could lead the way by adding income options directly into retirement plans, giving retirees more options for financial security. He cited data from insurance industry group LIMRA showing a record $385 billion in retail annuities were sold in 2023, with more than half tied to qualified retirement plans.

However, Pitney noted that these annuities often come with high fees, about 247 basis points, which could erode retirees’ income. He suggested that fiduciary responsibility could drive plan sponsors to reconsider high-fee retail annuities in favor of more cost-effective institutional products.

Anticipated Developments in Retirement Policy

Bret Hester, TIAA’s executive vice president and general counsel of strategy, policy and operations, highlighted the potential for a SECURE 3.0 Act, even with SECURE 2.0 Act of 2022 implementation continuing. While it is unlikely SECURE 3.0 will be a top focus in the first year of the upcoming administration, Hester said bipartisan support for retirement policy should remain strong.

“With the likely unified control of Congress and the White House,” he explained, “it may become easier to advance bipartisan policies.”

Hester marked the 50th anniversary of the Employee Retirement Income Security Act as a good time for reflection, noting that ERISA has excelled in guiding Americans to save for retirement but has left them on their own when it comes to spreading those savings out over their retirement years. As he put it: “It does a tremendous amount to get people to the point of retirement, but then abandons them once they reach it.”

Jason Key, TIAA’s managing director and head of consultant relations and sales operations, discussed potential solutions to the gap in retirement income planning, including the concept of a “qualified payout option.” This policy would help retirees manage the shift from saving to spending by offering streamlined, customizable options for decumulation.

Key said this could mimic the success of qualified default investment alternatives but focus on retirement income, rather than accumulation. He argued that many retirees depend solely on required minimum distributions, which aren’t necessarily the most effective strategy. Instead, retirees could benefit from managed payout options or systematic withdrawals, providing flexibility and better tax planning.

Shifting Attitudes Among Plan Sponsors

Diron Scott, a TIAA regional senior managing director of institutional client relationships, emphasized that plan sponsors are now more receptive to offering lifetime income solutions than they were a decade ago. Over his 30-year career, Scott has observed a major shift in thinking, with many sponsors now eager to discuss these options. He noted that participants themselves are beginning to ask for more predictable income solutions, indicating a broader understanding of the need for lifetime income in retirement planning.

The panel concluded that while regulatory changes might come slowly, the increasing demand from participants and openness among plan sponsors offer a window of opportunity. The industry can proactively address retirees’ needs for stable income, potentially driving significant change without waiting on regulatory bodies to take the lead.