The retirement tier: A tool to help participants meet their retirement income needs within a defined contribution plan

The retirement tier: A tool to help participants meet their retirement income needs within a defined contribution plan

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As people approach retirement, their investment priorities change. They become less concerned with growth and more concerned with preservation of capital and generating income. And they are looking to their employers for investment solutions that can help. The retirement tier describes the investment products and solutions available within defined contribution (DC) plans that address the unique needs of participants who are entering the decumulation phase of retirement.

The investment options in the typical retirement tier are focused on providing consistent returns and preserving capital, such as bonds, low volatility equity and stable value funds. These are options that are aligned with the income needs and lower risk tolerance of older participants who don’t have the luxury of time to recover from market downturns.


DC plan sponsors currently face three issues with respect to helping older participants plan for life after their last paycheck is cashed.

1. The plan’s current investment menu may not meet the needs of older participants

Older participants are less likely to be invested in a target date fund1 compared with their younger counterparts. They also tend to have a higher-than-ideal allocation to equities, which may not be appropriate for their age and risk tolerance. This preference for standalone investments may be due to older participants’ longer job tenure and higher plan balances compared with younger participants, and the fact that they are less likely to be auto-enrolled into the plan’s qualified default investment alternative (QDIA) — which is often a target date fund.

Figure 1. Average asset allocation of 401(k) plan accounts by participant age (percentage of account balances, 2020)
Figure 1. Average asset allocation of 401(k) plan accounts by participant age (percentage of account balances2 , 2020)

Source: EBRI/ICI, 2021.

Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated.

In recent years, there has been a growing focus on retirement income, and many older participants may be looking for investment options that can help them meet those goals. Most DC plans don’t currently have — and many don’t plan to offer — a secondary investment lineup for this demographic of participants,7 even though most plan sponsors say they want to keep retired participant assets in the plan.8

Figure 2. DC recordkeepers: Secondary investment lineup offered, 2022
Figure 2. DC recordkeepers: Secondary investment lineup offered, 2022

Source: Cerulli Associates, 2022.

2. Inconsistent distribution options for retired participants

The distribution options available to retired participants vary widely. Most plans allow retired participants to convert a portion of their account balances into systematic withdrawal payments, which can reduce the risk of depleting savings. Others allow participants to take a stream of guaranteed period payments with at least a portion of their balance. However, there is a lack of consistency from one plan to another regarding the calculation methods, amounts, and frequencies of ongoing plan distribution options — and not every participant benefits from guaranteed solutions, which often means locking in investments.

Figure 3. DC recordkeepers: Distribution options - Types offered to separated participants, 2022
Figure 3. DC recordkeepers: Distribution options - Types offered to separated participants, 2022

Source: Cerulli Associates in partnership with SPARK Institute and DCIIA, 2022.

3. Plan outflows exceed inflows

Longer life expectancies and the retirement of Baby Boomer workers are causing a major demographic shift in DC plans. Many plans now have — or will soon have — more retired participants than active.

The corporate DC market continues to see net outflows, increasing from $34.6 billion in 2019 to $121.1 billion in 2020. The large number of Baby Boomer retirements combined with a period of strong capital market performance (which translates to larger rollover balances) have contributed to increased net outflows.

The migration of retiree assets from DC plans has two potential consequences.

First, retired participants who roll their accounts out of the plan may miss out on the competitive investment fees and additional oversight that DC plans offer versus those of some retirement savings vehicles elsewhere.

Second, as its overall assets shrink, the plan may lose the benefit of scale with recordkeepers and investment managers, which could increase costs for both the plan sponsor and all participants.

Figure 4. Corporate DC market net flows, 2011-2021 ($ billions)
Figure 4. Corporate DC market net flows, 2011-2021 ($ billions)

Source: Cerulli Associates, US Department of Labor, 2022.

Our perspective

Offering a retirement tier is one way that plan sponsors can help fulfill their fiduciary obligation of acting in the best interests of participants — particularly if the retirement tier includes options for those who are approaching or in retirement that help minimize the risk of depleting their savings.

A robust retirement tier can also help plan sponsors retain participant assets after they retire, which in turn can keep plan costs at a reasonable level while also providing retirement income planning support that addresses the needs of older participants and aligns with their goals.

Voya recommends that plan sponsors consider establishing a retirement tier of investments in their DC plans that includes the following components:

  • A suite of target date funds to satisfy the plan’s qualified default investment alternative requirement and to simplify investment selection for participants who aren’t interested in a do-it-yourself approach while ensuring appropriate levels of investment diversification and risk. Encouraging participants who are approaching retirement to use target date funds can also reduce the risk of overexposure to equity.
  • Expanded fixed income and high-dividend, low-volatility equity investments to help ensure that older participants who want to follow the DIY approach have access to options with the appropriate amount of risk.
  • A retirement income solution featuring an optional guaranteed product can help those who have significant concerns about longevity. Tools that help older participants determine the optimal withdrawal strategy should be considered as they help allay fears and minimize the risk of running out of money in retirement.

1 Investment Company Institute/Employee Benefit Research Institute. (2022). 401(k) plan asset allocation, account balances, and loan activity in 2019.

2 Percentages are dollar-weighted averages.

3 A target date fund typically rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date of the fund, which is usually included in the fund’s name.

4 Not all participants are offered this investment option.

5 GICS are guaranteed investment contracts.

6 Equities include equity funds, company stock, and the equity portion of balanced funds.

7 Cerulli Associates. (2022). US retirement markets 2022.

8 PIMCO. (2021). Annual defined contribution consulting study.

Past performance does not guarantee future results. This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.

All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. All security transactions involve substantial risk of loss. A target date is the approximate date when investors plan to start withdrawing their money; principal value fluctuates and there is no guarantee of value at any time, including the target date.

For plan sponsor use only. Not for use with plan participants.