Decumulation In Defined Contribution: The Second Act

by: BlackRock


The growing focus on retirement distributions.

What should the solution look like?

Plan sponsors should focus on the following three features.

The 401(K) era is entering a new and expanding phase: the era of retirement income and asset distributions. We have already seen a demographic “tipping point” in 2013/2014 with assets leaving 401(K) plans exceeding assets being contributed or entering plans. This trend is expected to remain until 2030, peaking at $40 billion annually in 2019.

401(K) contributions and distributions (billions)

Chart: 401(k) contributions and distributions (billions)

Source: Bloomberg, as of 11/21/16. Nominal GDP is the economic growth rate, while real GDP is that growth rate minus inflation.

The growing focus on retirement distributions

Traditionally, defined contribution (DC) investment menus have focused on accumulation: the phase when people earn, save and invest during their working years. But the number of Americans over the age of 65 will more than double between 2015 and 2060 (from 48 million to 98 million). This will shift the current focus of DC platforms to include a greater emphasis on retirement distributions.

As part of the transition from saving to spending, most participants will want (and need) assistance to systematically decumulate their retirement assets, and DC plans – and target date funds – are the logical platform for the job, based on investor familiarity, infrastructure capabilities and regulatory changes.

The retirement environment these Americans will likely face differs significantly from those of previous generations as a result of forecasted lower returns, a lack of defined benefit pensions and longer life expectancy. Plan sponsors seeking to smoothly transition participants into retirement will require sophisticated solutions able to navigate the new era – and help them shift gears to adapt to a new set of behaviors and risks.

What should the solution look like?

The good news is that we believe that target date funds — such as BlackRock’s Lifepath — can be an effective in-plan, end-to-end retirement savings and spending solution for many investors. LifePath harnesses a unique lifecycle utility framework based on actual savings and spending behaviors and actuarial data. This framework enables LifePath to find the optimal pre-retirement spending rates, necessary savings rates and sustainable withdrawal rates to maximize the lifetime utility of an individual’s spending – meaning that retirement spending is already an integral element of the product’s objectives and structure.

The result is a solution that can enable participants to maximize their retirement savings while minimizing the level of savings required — all through the employer plan they already know.

Maintaining consistent lifetime spending

Chart: Maintaining consistent lifetime spending

Source: BlackRock. See footnote below.

Plan sponsors should focus on the following three features today, so that participants can receive the full value of their retirement assets through such a vehicle:

  1. Plan flexibility — Begin the process to update plan documents to allow for partial distributions post-separation from service and the ability to aggregate other qualified assets outside the plan, including spousal assets.
  2. Investment tools — Integrate a robust set of income projection and balance sheet management tools that provide participants greater clarity around income and managing expenses upon entering, and over the course of, retirement.
  3. Participant education — Offer materials around retirement income and decumulation for participants approaching, or in, retirement that speak to both the investment and behavioral challenges they may be experiencing.


† Please refer to BlackRock’s glidepath whitepaper titled Reexamining “To vs. Through” (May 2014) for additional details on the model.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.