Creating Retirement Income for Life: Reflections on an Award-Winning Innovation
In 2016, the University of California (UC) began offering new hires a choice of two retirement benefits: a defined benefit (DB) pension plan or a defined contribution (DC) plan. Since then, a growing portion of the employee population is covered by the DC retirement plan.
As the UC retirement team considered the implications of this trend, combined with the fact that more people are spending a longer amount of time in retirement, they had a vison to create a solution that would allow all employees to have a predictable income stream in retirement and would help prevent anyone from outliving their savings, regardless of the retirement plan they participate in.
This was the genesis and driving force behind the 2021 introduction of a new UC Retirement Savings Program feature—a first of its kind—the Deferred Lifetime Income option within their target-date funds.
The Deferred Lifetime Income option lets employees convert a portion of their DC savings to generate income in later retirement years by purchasing, from ages 62 to 69, a type of deferred income annuity known as a qualified longevity annuity contract (QLAC). The QLAC, called Deferred Lifetime Income, provides guaranteed income for life, starting at age 78, and offers retirees protection from outliving their savings, shelter from financial market volatility, and the ability to pass the benefit on to a spouse.
Rolling out a new solution is never easy, and is especially challenging when it’s the first of its kind. For pioneering this effort and for the remarkable amount of time, effort, partnership, and focus it took to launch, UC was recognized with a 2022 Excellence and Innovation Award—a highly distinguished award co-sponsored by the Defined Contribution Institutional Investment Association (DCIIA) and Pensions & Investments.
Segal Benz was honored to collaborate with UC and their partners, State Street Global Advisors (SSGA) and Fidelity Investments, on the strategy and to create communications that introduced this new feature to UC employees. We recently had the chance to sit down with UC staff members Marco Merz, Managing Director and Head of Defined Contribution, and Hyun Swanson, Director, Retirement Savings Program, Office of the President, to discuss these enhancements and how their people have benefited from them. Here’s a recap of our conversation, which has been lightly edited for clarity and brevity.
Income for Life: A Look Back at the Program Rollout
Segal Benz: It’s been quite a few years since you first started thinking about the qualified longevity annuity contract (QLAC) enhancement. As you reflect on that journey, what was your inspiration to bring retirement income into the UC defined contribution plans?
Marco: The catalyst was the introduction of Savings Choice, a pure defined contribution (DC) benefit, in 2016. For the first time ever, new hires were given another option apart from the pension. We recognized that some full-time employees were selecting the DC-only plan and would not have access to guaranteed retirement income through UC’s pension. Over time, we’ve seen a steady adoption of Savings Choice from new hires. We wanted to make sure that guaranteed income was available for all participants to consider.
Hyun: Additionally, we recognized the changing demographics of our workforce. We have people joining our team mid to late in their careers. They have already accumulated assets in other DC plans. These individuals may not be able to earn as substantial a pension benefit as longer-term employees, so we wanted to find a way to assist them in potentially annuitizing their DC savings from a prior employer.
Segal Benz: How has Deferred Lifetime Income been received?
Marco: We like to look at it from two vantage points: communication and adoption. This change brought about a unique communications opportunity to educate participants more broadly about retirement income planning, and that effort was tremendously successful. It wasn’t just a product launch. We were able to help participants get engaged with their retirement readiness.
If you look at the adoption rate from a pure dollar-and-cents perspective, we haven’t seen a huge conversion of savings into the QLAC yet, which was fully expected. The current eligible population, who are between the ages of 62 and 69, have a very strong pension benefit and don’t need an additional guaranteed income stream.
This solution is built for the long term and for our future generations of retirees who have chosen the defined contribution benefit and who don’t have access to guaranteed income through the pension.
Hyun: I was really encouraged during the socialization process. We consulted many stakeholders, especially our faculty—many of whom are experts in this area. It was encouraging to hear them talk about how the Deferred Lifetime Income option is an excellent way to help participants meet their needs in retirement. That feedback felt like a big stamp of approval. We even featured a UCLA emeritus professor of economics, who studies annuities, in our communications materials.
Marco: Another benefit is accruing to the DC industry as a whole. We’ve had numerous interactions with other plan sponsors who are thinking about guaranteed income. We hope that from an industry perspective, more plans will consider making enhancements like these.
Segal Benz: Now looking back, is there anything you would do differently?
Hyun: Trying to simplify the QLAC purchase process is an ongoing effort. Also, the fact that it’s a product that is not yet as well-known and understood by people is a challenge. Everyone knows what a 401(k) is. Educating people on how the QLAC works is more complex.
Marco: Additionally, from a communication perspective, going forward we want to lead with the value of what you can get from deferred lifetime income. For example, “Imagine getting $800 a month for the rest of your life!” We think it will be more impactful to lead with the potential benefit and then explain how it works.
Segal Benz: What advice do you have for other plan sponsors who are thinking of doing this?
Marco: Getting your stakeholders on board early is critically important. Ideally, you give them a voice and make them part of creating the plan design and strategy. The operational aspect cannot be underestimated. Adding an income product is complex and comes with a significant time commitment. It’s not like adding a new fund to your lineup and sending a one-page communication.
Hyun: This was a huge effort that required a lot of teamwork. One individual cannot do this alone. A lot of organizations want to roll out these solutions but are concerned about resourcing. Our advice is to have a co-champion. The work is worth it, however, because it’s so important to provide a feature like this, especially when participants don’t have access to other sources of guaranteed income. Participants also need a resource where they can have a conversation about this, where they can understand how it fits into their larger financial planning strategy.
Key Takeaways
We’re thrilled to have played a part in supporting UC’s launch of their innovative retirement income solution for their people. As you rethink your retirement income programs, keep these key takeaways in mind.
- Be prepared to educate plan participants on how to make their retirement savings last throughout their golden years.
- Get your stakeholders on board early, and involve them in the strategy and plan design of your offering.
- Don’t underestimate the value of a solid strategic communications plan. Helping participants understand their options and aiding them in the decision-making process is as important as the implementation.
- Think bigger picture and long term. These solutions are built with future generations of retirees in mind. As the retirement landscape continues to shift, having a solution that guarantees retirement income for participants is mission critical.
We’re proud to work with organizations that value their people. If you want to learn more, we’d love to talk.
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Gabby Kerrigan, Communications Consultant, is experienced in developing and implementing results-driven engagement strategies that help employees better interact with their benefits.
