The defined contribution retirement plan system in the United States is a powerful wealth-creation vehicle for middle-class and mass affluent Americans. Yet despite decades of diligent saving, the relative complexity of creating sustainable retirement income from accumulated assets and the related challenge of optimizing Social Security claiming mean many people achieve suboptimal outcomes in retirement.
This is one of the conclusions drawn in a recent paper published by David Blanchett, managing director and head of retirement research at PGIM DC Solutions. The paper explores the potential benefits of delayed claiming of Social Security "from a DC plan perspective."
According to Blanchett, the analysis suggests that the average retiree, and especially the average DC participant, would likely benefit from delayed claiming. However, relatively few retirees fully delay to age 70 or appear to have the financial means to do so when focusing on retirement plan balances alone.
Therefore, Blanchett argues, increasing awareness of the benefits of delayed claiming to DC plan participants is important for industry professionals and policymakers — as is ensuring that participants have considered the strategy as they contemplate allocating potentially limited assets to an alternative lifetime income solution, such as an annuity.
The paper points to one approach to potentially improve claiming behaviors: "preconditioning" participants by creating a "bridge account" within the DC plan's default investment specifically earmarked to fund spending during the delay period. Overall, Blanchett says, the work suggests that delayed claiming needs to be more proactively considered among DC plan sponsors and participants.
How a Bridge Would Work
The crux of Blanchett's argument is the creation of an overtly labeled "delayed claiming account" sleeve within a given DC plan, ideally within the default investment itself, which is typically a target-date fund or a managed account.
"The bridge sleeve (or account) would be used to bridge the income gap during the delay period and would generally be expected to be invested in relatively liquid securities," Blanchett explains.
These securities could include primarily defensively minded fixed income investments, but they could also include more limited amounts of equities and alternatives to support additional growth, depending on the plan population or individual being considered.
According to Blanchett, having a sleeve explicitly geared toward delayed claiming would not only behaviorally prepare participants to delay claiming but would also result in a significantly higher level of flexibility than strategies that require a higher level of commitment, from both participants and plan sponsors.
"While the monies in the 'delayed claiming account' sleeve could (or ideally would) be used to fund delaying Social Security, they could also be used to purchase a different type of annuity or not annuitize at all. There is significant optionality to the savings," Blanchett concludes.
Beyond 401(k)s
In comments about this and other recent analytical work shared with ThinkAdvisor via email, Blanchett emphasizes that 401(k)s are a "great place to save for retirement" but that it is also important to keep DC-based saving in its broader context. For example, if a worker is fresh out of school with lots of debt and other pressing financial needs, there might be better uses for money.
