Fewer Assets for Equal Income

According to Prudential’s report “What Employers Lose In The Shift: From Defined Benefit To Defined Contribution Plans… And How To Get It Back,” incorporating GMWBs into defined contribution plans may reduce the level of assets required for plan participants to achieve the same level of retirement income.

The white paper found that, compared with the recommended maximum level of withdrawals from a traditional plan, participants may not need as much in their retirement savings as previously believed to achieve the same outcome. By pooling the longevity risk of defined contribution participants, those with GMWBs benefit from the ability to have guaranteed income for life and get more income from the same amount of savings. 

Plan participants who have to work longer and save more to achieve a secure retirement delay their own retirement and make it harder for their employers to forecast and manage staffing needs. According to the paper, these difficulties may lead to increased workforce costs and reduced employee engagement. GMWBs can benefit plan sponsors by allowing them to help manage such workforce planning challenges.

“Despite employers’ substantial investments in defined contribution plans – including matching contributions and participant education – many DC participants will not be able to retire when they want without a guaranteed income solution,” said Christine Marcks, president, Prudential Retirement. “The incorporation of these guarantees into DC plans directly addresses the challenges facing individuals and employers today by reducing the amount that individuals must save to achieve a desired level of retirement income and increasing the probability than an individual can retire by a certain age.” 

The paper's comparison of retirement outcomes from a traditional DC plan versus a DC plan with a GMWB is based upon Prudential Financial's calculation of 2,000 Monte Carlo simulations of different patterns of investment returns.

The full report is available here.