“There’s a sign on the wall, but she wants to be sure, ’Cause you know sometimes words have two meanings”
—Led Zeppelin, 1971
“Stairway to Heaven” is often regarded as one of the greatest rock songs of all time. From the layered musical arrangement to the unique vocal performance, it’s easy to see why it’s one of the most popular songs across multiple generations. The lyrics are somewhat abstract, and the songwriter himself, Robert Plant, has famously been quoted as saying that even his own interpretation of the words can change by the day. And, of course, who can forget the guitar parts? Jimmy Page’s guitar solo is among the most memorable of all time.
What does any of this have to do with retirement income in defined contribution (DC) plans? We believe there are interesting parallels worth highlighting and lessons to be learned.
WORDS HAVE TWO MEANINGS
As stated in the song’s lyrics and reinforced by the author, sometimes words can have more than one meaning. Today, we define the multiple meanings of “retirement income” and help clarify some terminology that’s often misinterpreted.
When crafting any good song, the songwriter starts with a feeling. Aon takes the same approach when helping a retirement plan committee or plan sponsor think about the role of retirement income for their participants and beneficiaries. Do the decision makers feel that their plan should help people save for retirement, or do they feel that it ought to help people save for retirement and manage their savings and spending in retirement? One of Aon’s core tenets is the belief that DC plans are retirement plans and not simply savings plans, so the first step in this journey is to help a plan sponsor uncover its own feelings on this topic.
Often this first step leads to an agreement that the DC plan is indeed a retirement plan, so the next step is to define what retirement income means to the employer. First, we want to clarify the meaning of two terms that are often used interchangeably: retirement income and lifetime income:
- Retirement income is what it sounds like: income that’s received in retirement.
- Lifetime income is also income that someone receives in retirement, but you can’t run out of lifetime income—it is insured. By definition, it lasts a lifetime.
Lifetime income is retirement income, but retirement income isn’t always lifetime income. There are guaranteed solutions and there are non-guaranteed solutions, and both have a place, depending on the needs and preferences of those defining retirement income at the sponsor level and the participant level.
THE FORBIDDEN SONG
Despite the accolades that “Stairway to Heaven” has received as a guitar masterpiece, if you’re a player, you’ve probably found that performing this tune in a guitar store is met with dirty looks—an unspoken rule that was famously memorialized in a scene from Wayne’s World. In the 1992 movie, Mike Myers’ character plays the intro and is silenced by an employee and directed to a sign on the wall reading “NO Stairway to Heaven.” Perhaps the joke was a throwaway one-liner, but one that deeply resonates with guitar store staff who have heard the riff repeatedly for decades.
In the DC world, we observe a similar dynamic. Employees and employers, separately, agree about the importance of retirement income. About 80% of employees say that they want some form of guaranteed income in retirement,1 and almost 70% of employers believe that DC plans should include lifetime income options.2 Relating this back to our rock ’n’ roll analogy, retirement income is a single with the backing of the insurance, asset management, and consulting communities alike, and it’s known to be a fan favorite. An overwhelming majority of employees are cheering for income in retirement. A similarly high percentage of employers think that retirement income options should be taking the stage. Yet, most plans haven’t done anything. It’s as if there’s a big sign in the back of the store that reads “NO Retirement Income.”
THE BIG FINALE
Now, employers are armed with a feeling and lyrics (philosophy and a proper understanding of the terminology), having developed the chops to play the retirement income anthem for all the world to hear, but they’re met with this resistance to performing it. The lights dim and the band flees the stage, waiting to see if the audience will cheer for “one more song!”
Quietly at first, an encore chant begins to build. US lawmakers were first to call for more, raising their lighters and passing the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. This chant will build to a roar this year when annual lifetime income disclosures become mandatory. These disclosures will likely influence more participants to explicitly ask how they can receive lifetime income. We believe that this call from the crowd will overwhelmingly bring plan sponsors back onto the stage and encourage them to play the forbidden song that’s been ignored for so long.
The journey from the dressing room to the stage isn’t an easy one, but we stand ready with flashlights and a capable crew to lead the way. It may take multiple meetings and sometimes multiple years to really work through our advice framework. This is not because Aon’s retirement income advice framework is complicated, but because these decisions are hard. Luckily, we now have more and more examples of rock star employers coming forward and publicly talking about their retirement income journey. These plan sponsors do not speak from a place of ego, but instead are being consultative to their brethren. They are handing out sheet music, explaining how to imitate their moves, and giving free lessons away so that the journey for those quickly following behind continues to become shorter and easier.
As in music, what starts as an unconventional sound can sometimes morph into a movement. Before you know it, years have passed, and that sound is even referred to as “classic” with the benefit of hindsight. Today, retirement income in DC plans may seem, to some, like an unconventional act in a small dive bar basement. We believe this is just the beginning of a massive movement that will have retirement plans singing along for decades to come.
William (Bill) Ryan, Partner, heads Aon’s North America Defined Contribution Multi-Asset Solutions (DCMAS) team, which includes over 35 Aon colleagues who focus on supporting over 370 of Aon’s DC clients. He holds a BS in management from Rensselaer Polytechnic Institute and an MBA in corporate finance from the University of California, Irvine. Bill is a Chartered Alternative Investment Analyst (CAIA®), a Senior Professional in Human Resources® (SPHR®), and a candidate for the Chartered Financial Analyst® (CFA®) designation.
Greg Fox, Associate Partner, heads Aon’s US DC Retirement Income Solutions team. Greg’s core responsibilities revolve around educating employers on the market landscape and helping to translate the complexities of this topic into a step-by-step guide toward implementation. Greg graduated Seton Hall University’s Stillman Business School magna cum laude with a double major in finance and economics. He is also a Chartered Financial Analyst®.
Aaron Chastain, Senior Investment Consultant, heads Aon’s North America DCMAS Manager Research team and manages consulting relationships for corporate defined benefit and DC plans. In addition, he is a Senior Solutions Consultant on the firm’s DCMAS Custom Solutions team, specializing in custom multi-asset and multimanager portfolios. Aaron graduated summa cum laude from Berry College and is a Chartered Financial Analyst®.
- “Living the Dream? Aon DC and Financial Wellbeing Employee Survey 2018 (US),” Aon.
- Based on US results from Aon’s Defined Contribution Survey 2020.
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