The Retirement Income Dilemma

The retirement income challenge offers an opportunity to align corporate objectives with employees’ retirement goals. To do this, we suggest sponsors design a Retirement Income Plan Road Map. The journey begins with an assessment of participant needs along with an understanding of the current state of the retirement income landscape. From there, a sponsor can begin to articulate their retirement income philosophy, which could lead to one of two potential types of plans. 

The first plan type is an Accumulation Plan that focuses on accumulating balances throughout the working years—participants tend to exit the plan once they retire. The second type is a Destination Plan, one that actively works to retain retirees in the plan.

If for example the philosophy points to a Destination Plan, the sponsor can take steps to establish the proper plan design, determine which options should be available in the investment menu and implement the supporting services needed to help participants retire and stay in the plan. With the Accumulation Plan, the sponsor offers supporting services to help retirees transition into retirement and, potentially, out of the plan.

There is no right or wrong answer, but we think this approach is a useful framework for sponsors to address the retirement income challenge and navigate the often-confusing retirement income landscape.

State of the Retirement Income Landscape

As noted earlier, it's important for sponsors to understand the retirement income landscape, including regulatory and legislative developments, the state of Social Security and the solutions currently available in the marketplace.

Over the past decade, there have been several regulatory and legislative developments pertaining to retirement income. In particular, the Secure Act and Secure 2.0 included a variety of provisions designed to make it easier for plan sponsors to implement retirement income provisions.

However, it’s not all good news. The Social Security Trust Fund expected to be depleted by 2034⁷ when it's estimated that tax income will be sufficient to pay only 80% of scheduled benefits. Social Security forms the foundation for most American’s retirement income and any shortfall could have wide ranging implications for how and when employees retire, potentially creating challenges to employers’ ability to effectively manage their workforce. At present, there are currently no meaningful legislative initiatives to address this critical issue.

Next, we highlight in Exhibit 3 the key features of the retirement income solutions that exist in the markeplace today and how they might fit into a retirement plan menu. 

Some key takeaways from Exhibit 3 include:

1. There is a wide variety of options under the retirement income solutions umbrella. 
   
   
2. There are tradeoffs when it comes to the features and benefits of these solutions. For example, solutions without guaranteed income components tend to be more liquid than those that offer some form of guarantee. 
   
   
3. Given the complexity of the various solutions, it's unlikely that adding just one solution will solve all the retirement income needs of any one plan’s participant base. 
   
   
4. Appropriate retirement income solutions will depend on plan sponsors' overall retirement income philosophy that aligns with the workforce and plan characteristics.

Lessons Learned (So Far)

The retirement income conversation has been ongoing for several years, and we believe there are four lessons learned.

First, retirement concerns are universal. Our global retirement survey asked participants across the United States, Canada, the United Kingdom, and Australia for their views on retirement. We show the results of several questions in Exhibit 4, and it is noteworthy how consistent the responses are across different markets. 

Exhibit 4: Lesson One: Retirement Concerns Are Universal

US	63%	81%	66%	46%	65.4 years
Canada	66%	80%	69%	37%	65.4 years
UK	68%	80%	75%	37%	65.5 years
Australia	68%	89%	74%	43%	65.5 years

Source: MFS 2023 Global Retirement Survey. Q: Do you expect your retirement to be… This question was only posed to respondents age 45+. Q: How important is it for you to be able to consolidate all retirement assets into one or as few accounts as possible? Q: How confident are you that you will be able to retire at the age you want to? Q: What are your top financial concerns or worries regarding retirement? Q: At what age do you plan to fully retire (i.e., no longer work for pay?)

The second lesson is that retirement income presents potential drawbacks, and that in-plan retirement income solutions may not be a fit for all plan sponsors.

Exhibit 5: Lesson Two: Retirement Income Presents Potential Drawbacks

Lengthens fiduciary relationship (general retirement span is 20-30 years)	Potential for increased costs and governance oversight	Workforces with high turnover or short tenure may not be a good fit	Portability concerns (for both sponsor and participant)	Solutions and products available in the future could look quite different than today	Many do not want to be a first mover in this space	Company retirement account is only one component of participant’s total retirement picture

The third lesson is there is no one-size-fits-all solution to the decumulation puzzle. Our global retirement survey asked “Aside from Social Security and your personal retirement savings, what assets do you expect to use in retirement?” Exhibit 6 shows the wide array of income sources that participants identified and demonstrates that everyone’s puzzle pieces are different. Participants could potentially benefit from advice to help put these pieces together into a cohesive retirement income plan. 

That brings us to lesson four, which is that participants are looking for advice—in-person advice.

This point of access is important. We aren't suggesting that plan sponsors directly provide advice. Rather, sponsors have an opportunity to position the plan as a resource from which participants can access advice, education and tools. That access can be affiliated with the plans recordkeeper, managed account service or through an independent firm. 

This brings us back to our roadmap to help plan sponsors navigate through this complex topic. It starts with a fundamental question: Do you want to sponsor an accumulation plan where participants accumulate assets and exit the plan upon retirement, or a destination plan where participants are encouraged to stay in the plan upon retirement.

There is no right or wrong answer, and different sponsors will come to different conclusions based on their circumstances. For those that do want to sponsor a destination plan, there are three key dimensions to consider:

1. The plan’s design, in particular its ability to allow for flexible distribution options in retirement

2. The investment menu, what investments are you offering to keep retirees in the plan and what level of guaranteed options make sense?

3. Supporting services, including tools and potentially access to advice

Too often we find that the retirement income conversation is almost wholly focused on investment products that can be added to a DC plan menu as the proverbial silver bullet solution. While investments will undoubtedly be an important component of a plan’s approach to positioning itself as a destination plan, we believe decisions regarding the plan’s design and how it will support retired participants are just as important.

⁷ Social Security Administration 2023 Annual Report

Distributed by: U.S. – MFS Institutional Advisors, Inc. (“MFSI”), MFS Investment Management and MFS Fund Distributors, Inc., Boston, MA

The views expressed are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed. Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries. MFS® does not provide legal, tax, or accounting advice. Clients of MFS should obtain their own independent tax and legal advice based on their particular circumstances. No forecasts can be guaranteed.

Survey Methodology:

Audience: Ages 18+, employed at least part-time. Active workplace retirement plan participants / members in the US, Canada, UK, and Australia.* Data weighted to mirror the age / gender distribution of the workforce in each country. Methodology: Mode: 15 min. online survey. MFS not revealed as the sponsor. Field period: March 22 – April 6, 2023. Key Topics of Inquiry: Impact of market events, retirement confidence and advice, target date funds, retirement income and sustainability.

*To qualify in each region: US, actively contributing to a 401(k), 403(b), 457, or 401(a) / Canada, actively contributing to DC Pension Plan, Group Registered Retirement Savings Plan, Deferred Profit Sharing Plan, Non-Registered Group Savings Plan, or Simplified Employee Pension Plan / UK, actively contributing to a Defined Contribution Scheme, Master Trust, or Individual Savings Account. / Australia, actively contributing to an industry, retail, corporate or public sector super fund or a self-managed super fund. Arrows shown throughout represent trend from 2022 survey results