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Retirement Income Products in Defined Contribution Plans

Retirement is often depicted as a carefree, happy time, offering the opportunity to relax, travel, enjoy family and friends, and even take up a new hobby. It should be a stress-free period after a lifetime of work.

But too often, once wage-based income streams stop and the decumulation stage starts, many retirees experience financial anxiety. Beginning to tap savings and draw down assets—particularly during bear markets or times of volatility—triggers worried questions about whether life will outlast savings. Increasingly, without an additional source of income, the answer is “yes.”

It makes sense that one-third of all surveyed workers and retirees in an EBRI 2022 Retirement Confidence Survey see guaranteed products as an important part of retirement planning.

A similar number noted income stability was more important than preserving wealth. Pew Research finds an estimated three out of five employees would be willing to take more out of their paychecks each month to ensure a definite income stream.

Yet, fewer than 10% of 401(k) plans include a guaranteed retirement income offering. Why is this the case when it seems like an obvious choice? Are there misperceptions about the ability to utilize these assets more broadly?

The answer to the latter question is a pretty clear “yes.”

Regulatory changes under the Setting Every Community Up For Retirement Enhancement Act (SECURE Act) have significantly reduced the risks of offering annuity-type products. Pending legislation under the Securing a Strong Retirement Act (known as the Secure Act 2.0) expands the ability to include annuities in retirement funds and makes it easier for retirees to defer income streams, protecting them as they age (and potentially live longer than expected) and draw down their savings. These are all positive—and welcomed—changes.

But if the regulatory burdens have been removed, and the assets are in demand, why haven’t such products caught on?

Servicing Challenges

In large part, the slow uptake in guaranteed income products comes down to technology and the historical inability of many plan recordkeepers to handle such assets. A lack of backend infrastructure to support the products and limitations on how they can be presented on participant web portals are the primary impediments to wider adoption. Some recordkeepers cannot currently service any annuity-based solutions on their platforms.

As well, people are changing jobs more frequently, leading to the need for portability, or the ability to smoothly transfer and value retirement assets between providers. This requires the new plan to be able to service all of the assets that are transferred. As noted above, some recordkeepers don’t have any capability to service guaranteed income. Others may support such assets, but only through investment into their own firm’s proprietary products. Add to the list of challenges the ability to obtain—and maintain—data connectivity between several players and then track and account for a variety of underlying guarantees (with different underlying structures). All of these needs require a significant technology investment that only a few recordkeepers have made.

But there is a more efficient and scalable way to offer, distribute and service guaranteed income solutions. That solution is middleware.

Middleware: The Efficient and Scalable Solution

Middleware technology delivers connectivity between plan providers, product providers and recordkeepers, regardless of what other servicing platforms are used. It delivers a one-to-many income marketplace for data connections, valuations, oversight, calculations and distribution. Because the platform is agnostic and able to service all annuity types and work with any recordkeeping platform, it promotes the seamless portability of an investment and its associated benefits. Whether a participant wishes to change plans or roll over their plan to an IRA, a plan changes recordkeepers, or the product is dropped, middleware can help accurately and appropriately account for and maintain the guarantees accrued by the participant.

SS&C’s Retirement Income Clearing and Calculation (RICC) middleware platform is the industry-leading middleware option. Launched in 2008, it can be used by SS&C’s TRAC clients or those who utilize other recordkeeping technology platforms. In addition to the features noted above, benefits also include online annuity account opening capabilities. SS&C Retirement Income Solutions’ wider suite of digital applications integrates with RICC to streamline a participant’s investment into annuities. Efficient and fast participant-friendly tools educate, inform, and model potential benefits and risks. Data-powered microsites supply targeted tools and calculations to help providers and participants understand their options, how much their choices may cost, and how any selections impact future income streams.

RICC was built by experts who have a combination of strong retirement recordkeeping expertise and technological knowledge. It is an advanced, flexible middleware platform that provides a critical solution for recordkeepers who wish to include guaranteed income products on their platforms and for retirement income product providers who are looking for a network of connected recordkeepers to whom they can distribute their solutions.

With RICC and SS&C’s other range of retirement technologies, and the broader availability of guaranteed income products a financially secure retirement can become a more achievable reality for all.

To learn more, download our "Lifetime Income Solutions: Changing the Face of Retirement" eBook.

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