TIAA's Target Date Fund Alternative Acts Like a Pension

The goal of a retirement plan is to provide participants with inflation-adjusted income in retirement, Pitney said. To do that, sponsors have to be able to define risks and "add more confidence around the desired income," he continued.

Say a client wants an income goal of $40,000. "If the assets are not managed in the proper way, you may have significant volatility around that income. … The idea is to tighten the risk bands around that $40,000 and provide more certainty that they'll be able to achieve that number."

LDI strategies help reframe the retirement discussion on income rather than accumulation, Pitney said.

A $300,000 account will lose 18% of real wealth with inflation at 2%. At 4%, the loss increases to 32% of real wealth.

Interest rate risk can have a dramatic impact on annual income, too. Annual interest income from that $300,000 account falls by 71% with an interest rate of 1% versus 3.5%, Pitney explained.

Say a 64-year-old client is retiring next year and needs $3,000 a month to maintain his lifestyle. He needs to have saved $640,000 to create $36,000 a year in income. However, if interest rates change 1%, the target savings amount for the portfolio changes to between $540,000 and $730,000.

"As you get closer to retirement, interest rates have a significant impact on whether or not that participant is going to be able to buy the income they need."

One of the more difficult aspects of retirement planning is to get participants to think about income, Pitney said. "When it came to a defined benefit plan, nobody ever asked what their balance was because they couldn't get at it." The focus was on monthly income rather than total balance, he said.

— Read TDFs' Underlying Funds May Not Meet Plan Sponsors' IPS Standards on ThinkAdvisor.