Income Innovation: Effective 401(k) Income Products Are Finally Here – The 401(k) Specialist

401(k) Specialist: Why is decumulation a focus for BlackRock now?

Kaushik: BlackRock has been working on solving the decumulation conundrum for decades – providing participants with a consistent level of consumption over their lifetime is fundamental to our glidepath methodology. What has changed is we now feel like we are developing a solution that solves many of the challenges the first generation of income solutions failed to address.

Over the past few decades, the 401(k) industry as a whole has made great strides in better preparing participants for retirement by incorporating auto-enrollment and auto-escalation features while also adopting target-date funds as the default investment. However, to-date the challenge of decumulation has been largely ignored.

As we’ve shifted from Defined Benefit to Defined Contribution plans, we now have the first waves of people retiring who are solely depending on their defined contribution savings and Social Security to fund their retirement. The problem with this is that many of these people have no idea how to spend down these assets in a sustainable manner.

401(k) Specialist: What are the challenges when it comes to spending down in retirement?

Kaushik: The problem is three-fold. Number one, nobody can predict how long they’ll live so knowing exactly how long an individual will need to make their savings last is an impossible task. Number two, retirees are more susceptible to market volatility since they’re drawing down savings to meet their income needs rather than relying on a paycheck from an employer. Number three, they don’t know what their income needs throughout retirement will be, exactly.  We’re asking regular individuals to solve a problem that many of the most sophisticated investors cannot.

401(k) Specialist: What makes a good retirement income solution?

Kaushik: Many companies are coming to market with a retirement income solution. You can’t turn one way or the other and not see something branded as retirement income. We offer three considerations that should be the underpinning of anything done in this space, and they’re all tied to spending in retirement.

• Does this investment maximize the amount of retirement income I may be able to generate?
• Does it help me spend as consistently as possible over time, recognizing that I likely have essential expenses to meet? I need a floor for my spending, and then maybe it goes up and down around that for discretionary spending.
• Does it provide income for the rest of my life? Longevity risk is a real risk that people face.

Whatever solution you’re looking at should address these three items, knowing that you can’t get all three necessarily perfect.

401(k) Specialist: Even if people have savings, they’re often not spending it down in retirement. Why? Is it just fear of running out?

Kaushik: It’s not just fear, it’s a couple of things. Sometimes it’s longevity- people don’t know how long they’ll live so they hoard their savings.  Sometimes people simply don’t want to spend down in retirement because they’ve formed an emotional attachment with their savings balance. Most retirees have been working for 30 to 40 years and are used to looking at their nest egg grow overtime. Tapping into that savings balance to meet their income needs in retirement is a real daunting task from a behavioral aspect.

What’s interesting about the retirement income market is that if you give people more transparency about what their income could look like in retirement (and whether income matches with what they think they might need from a spending perspective), people could feel more secure.  

401(k) Specialist: What’s still needed to create realistic retirement income for American workers?

Kaushik: There are a couple of ways to go about this. The first is education. How can we help people understand how their savings balances may translate into a steady “paycheck” in retirement that will last for a lifetime? The key here is providing retirement income education early and often to reframe the relationship participants have with their 401(k) plans.  

The second piece is automation. How can we leverage and evolve the auto-features that have worked so well in the past to address the decumulation challenge in retirement?  Embedding the option for guaranteed income in target date funds uses what people know and are already familiar with. It can fit within the plan’s ecosystem, and it’s something that participants may be comfortable with even if it is innovating “under the hood” for them. 

We’re working on a really innovative retirement income solution, a new strategy that will combine a target-date fund for the accumulation component but also embeds the option for guaranteed income, payable by selected insurers, into the product’s lifecycle.  This income can help individuals cover their essential expenses for the rest of their life while remaining assets can stay invested, allowing for the opportunity for capital appreciation and also serve as a pool of assets retirees can draw from to meet discretionary spending needs. 

Incorporating these tactics will hopefully build a simpler, more secure retirement. That ties in well with BlackRock’s mission of helping more and more people experience financial well-being.

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