Retirement Report, Spring 2025

DC Committee Releases Decumulation Issue Brief 

CarnovaleThe Pension Committee’s Defined Contribution (DC) Subcommittee released an issue brief in March, Decumulation Strategies: Creating Lifetime Income from Defined Contribution Plans, which outlines the insured and non-insured options available through employer-sponsored DC retirement plans. It also compares these options across key features and strategies. The subcommittee also published an issue brief executive summary, offering highlights. A related webinar on the issue brief and topic is set for May 29. 

Retirement Report asked Subcommittee Chairperson Maria Carnovale about some of the paper’s key issues, and related retirement topics. 

What prompted this issue brief and how long was it in development?

The idea for this issue brief originated within the Pension Committee, even before the DC Subcommittee was established. Our goal was to create a resource for consulting retirement actuaries who advise DC plan sponsors, helping them understand the risk and reward trade-offs of various in-plan insured lifetime income options. Additionally, we aimed to provide insights for life actuaries who are familiar with retail annuities but are less acquainted with group retirement planning and the unique features of in-plan annuities. 

You participated in the Hill visits. What were some key topics or takeaways discussed on the pension/retirement side?

Common themes discussed were lifetime income options in DC plans, addressing the PBGC [Pension Benefit Guaranty Corporation] single-employer fund surplus, understanding the extent of spousal protections in 401(k) plans, and of course, Social Security. (See more, next story.) During one meeting, we were specifically asked if we had resources on the inclusion of insured lifetime income in Qualified Default Investment Alternatives (“QDIAs”). Fortuitously, this is the topic of our next paper, which is already in the works! 

Did you discuss key points from the issue brief at the recent Hill visits? 

Yes, this paper was included in the Academy packet we provided to Hill staff during our meetings. Lifetime income was a topic of discussion at multiple Hill meetings. Staffers from both sides of the aisle seem interested in improving lifetime income access and outcomes.  

The executive summary discusses Insured versus uninsured DC plan payment options—what, generally, are the highlights of each?

Non-insured drawdown strategies, such as required minimum distributions (RMDs) or the 4% rule, offer the most flexibility and upside investment potential during both the accumulation and payout phases. However, they do not protect against downside investment or longevity risk. It can be difficult to efficiently manage these risks on an individual basis. For instance, a participant might need to adopt a very conservative payout strategy. 

Insured in-plan payment options, on the other hand, leverage risk pooling to manage investment and longevity risk. In exchange for a fee paid to the insurance company, participants receive more certainty and guaranteed payouts. This approach can be used for a portion of a participant’s DC balance, while they manage the rest using a non-insured drawdown strategy. 

Participants can control the extent to which they trade liquidity and upside investment potential for certainty, depending on the chosen product. Our paper outlines key features and attributes that stakeholders can use as a reference when evaluating different options: 

• Income guaranteed for life 

• Level of liquidity (both pre- and post-income commencement) 

• Post-retirement death benefit to heirs 

• Extent of downside protection (both pre- and post-income commencement) 

• Extent of upside potential (both pre- and post-income commencement) 

• Fees 

• Simplicity

As we consider the “three-legged stool” for retirement savings (employer pension/retirement plans, personal savings, and Social Security), is there anything else that policymakers should be thinking about when we consider DC plans and other retirement saving mechanisms? 

The employer leg of the three-legged stool has evolved significantly since ERISA was passed more than 50 years ago, with much of the responsibility shifting to employees. In traditional DB pension plans, employers provided the pension benefit, decided how to invest the assets, and assumed the investment and longevity risk. With the shift to DC plans, retirement benefits may depend on employee savings, such as in cases where the employer only provides a match. Employees now must decide how to invest their money and ensure it lasts their lifetime. Similar trends are seen in employer-provided health insurance with the shift toward high-deductible health plans and HSAs. 

In this framework, employees have more autonomy and play a more active role in their retirement planning and execution. However, they lose the risk pooling feature of traditional DB plans. Certain risks, like longevity risk, can be more efficiently managed when pooled in a large group. The next frontier in employer-provided retirement plans will likely involve finding ways to reintroduce risk pooling. Actuaries are uniquely suited to address this challenge and should play a central role in developing solutions. 

What else is the DC Subcommittee thinking about this work product and future work products? 

This issue brief serves as a foundational piece for all the publications yet to come. We are excited to delve deeper in our next work product, which explores embedding insured lifetime income products in Qualified Default Investment Alternatives (QDIAs). As I mentioned, this topic arose during Hill visits, and it’s one that the ERISA Advisory Council chose to study last year. I think we will be able to share a unique actuarial perspective on this hot topic. 

 

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