Navigating the decumulation phase: Retirement income solutions in DC plans

As Defined Contribution (DC) plans have become the primary retirement savings vehicle for many individuals, the challenge of converting accumulated savings into a sustainable stream of income throughout retirement has gained prominence. This report explores the concept of retirement income and reviews the types of solutions currently available to DC plan sponsors governed by ERISA. It analyzes the advantages and disadvantages of these solutions, outlines criteria for evaluating providers and products, and discusses key fiduciary considerations. Additionally, it examines the implications of portability and expenses. The evolving regulatory landscape—shaped significantly by the SECURE Act of 2019 and the SECURE 2.0 Act of 2022—continues to influence the development and adoption of these solutions. 

DC plans were traditionally designed as vehicles for savings accumulation. Today, they are increasingly expected to serve as sources of sustainable lifetime income for retirees.

The transition from accumulation to decumulation exposes a gap in traditional plan design. Retirees are often left to navigate complex financial risks on their own, including longevity, inflation, healthcare, and market-related risks. As a result, the role of a defined contribution plan needs to evolve from primarily a facilitator of savings to also becoming an enabler of retirement income.

The decumulation phase introduces risks that were largely absent or managed by employers during the Defined Benefit era. These risks directly affect a retiree’s ability to generate and sustain income:

• Longevity risk: This is the risk of outliving your wealth. Calculations based on data from the Society of Actuaries show that a 65-year-old couple has a 50% chance of one spouse living to 92 and a 10% chance of one spouse living to 100.¹
• Overspending risk: is the danger that retirees spend more than their resources can sustainably support, increasing the likelihood of running out of money later in life. 31% of retirees say they are spending more than they can afford in 2024.²
• Underspending risk: is the opposite problem: retirees spend too little, even when they can afford more, sacrificing quality of life unnecessarily. Surveys show that many retirees cannot identify a reasonable withdrawal rate—answers ranged wildly (e.g., 8%, 30%, 52%), illustrating widespread confusion.³
• Inflation risk: Inflation is a concern for everyone, but especially retirees. Wages tend to rise with prices over time, helping to insulate most workers from inflation risk. Once they retire, people may lose this crucial defense. Because retirees often rely on sources of income that may not grow with inflation, even a gradual increase in the cost of living can pose a challenge. At a 2½% rate of inflation, for example, consumer prices end up doubling after 28 years.⁴
• Sequence-of-returns risk: Perhaps the most acute and least understood danger of the decumulation phase is the risk associated with the timing of investment returns. A significant market downturn in the first few years of retirement can have a devastating and permanent impact on a portfolio’s longevity. When a retiree withdraws funds from a portfolio that has just experienced a loss, they are forced to sell more shares to generate the same amount of income. This crystallizes the loss and permanently reduces the capital base from which future growth can occur.
• Healthcare risk: More than half of pre-retirees have said that they are concerned about the rising costs of healthcare and their potential to deplete their retirement savings.⁵ According to the U.S. Department of Health and Human Services, at least 70% of people over 65 will need long-term care at some point.⁶

Plan sponsors today can choose from a broad range of retirement income solutions designed to help participants generate income from DC plan assets. These solutions generally fall into three categories.

Non-guaranteed solutions offer methods for generating retirement income without the use of an insurance contract. They provide maximum flexibility and liquidity but place the full burden of managing longevity, market, and sequence-of-returns risks on the retiree.

Guaranteed solutions leverage the insurance principle of risk pooling to protect participants against longevity and, in some cases, market risk. These products are designed to provide a predictable, pension-like income stream that participants cannot outlive.

Hybrid solutions combine elements of investment-based and insurance-based approaches. Examples include Hybrid Target-Date Funds (TDFs) and Hybrid Managed Accounts.

A prudent process for evaluating and selecting a retirement income solution containing insurance should be methodical and well-documented. The following steps provide a framework for plan sponsor committees:

Step 1: Assess participant demographics and needs

Step 2: Evaluate provider financial strength

Step 3: Analyze product features and costs and experience

Step 4: Evaluate recordkeeper capabilities

Step 5: Document the entire process

The evolution of the DC plan from solely a supplemental savings tool to the primary source of retirement funding, combined with an aging demographic, has created an urgent need for effective decumulation strategies. Read our full report to discover:

• Detailed comparison of retirement income solutions currently available to plan sponsors
• Fiduciary considerations
• Detailed plan sponsor framework for evaluation and selection
• In-depth portability and expense analysis