Five-dimensional framework offers retirement plan sponsors
the ability to identify 'best-fit' retirement income solutions for
their defined contribution (DC) plan participants
BALTIMORE, June 18,
2024 /PRNewswire/ -- T. Rowe
Price, a global investment management firm and a leader in
retirement, unveiled a new, patent-pending framework to help
defined contribution (DC) plan sponsors evaluate retirement income
offerings and quantify which solutions may best fit the needs and
preferences of their plan participants. Today, most DC plan
sponsors describe their participant demographics as aging, and they
express a desire to retain retired participants in the plan
throughout retirement.1 Both factors are contributing to
the interest in evolving the DC plan to better accommodate the
needs of pre-retirees and retired participants.
T. Rowe Price's global retirement
strategy team and global multi-asset research team collaborated on
developing the framework, recognizing that the industry lacked a
common, unbiased method to help plan sponsors evaluate the growing
universe of retirement income products. The five-dimensional (5-D)
framework fills this gap. It offers DC plan sponsors, their
advisors, and consultants a standard language to understand how
different retirement income products require tradeoffs to meet
specific plan participant objectives.
Investments solutions used during the savings phase are
generally evaluated on a two-dimensional basis, focusing on a
certain level of return for a given level of risk. This new 5-D
framework for the decumulation phase identifies a wider range of
objectives unique to the spending phase, namely:
- Longevity risk hedge: how many years will retirement savings
last?
- Level of payments: what will the amount of annual income
be?
- Volatility of payments: how much can "paychecks" change from
year to year?
- Liquidity of balance: if a need arises, how much savings can be
accessed?
- Unexpected balance depletion: how high is the risk of money
running out earlier than planned?
Quantifiable metrics assess how well various retirement income
solutions may help plan participants achieve these objectives.
"We are continuously evolving our retirement research and
offerings to facilitate choice and personalized solutions that can
best fit retirees' needs," said Sebastien
Page, Head of Global Multi Asset and Chief Investment
Officer at T. Rowe Price. "It is our
hope that the 5-D framework and supporting research will become a
standard for how in-plan retirement income solutions are evaluated.
Our team has created an unbiased and uniform model that allows plan
sponsors to visualize, compare, and contrast retirement income
products."
"Much of the retirement income research conducted to date
focuses on identifying participant preferences, for example, 'I
want a guaranteed stream of income.' However, it fails to consider
the other side of the ledger, 'I am willing to give up X% in
monthly income' to achieve that preference," said Jessica Sclafani, Global Retirement Strategist
at T. Rowe Price. "The
interconnected nature of the 5-D framework examines and quantifies
these tradeoffs that are uniquely inherent to retirement income
needs. It offers a common method to compare and evaluate retirement
income solutions."
For more information, an article, "A five‑dimensional framework
for retirement income needs and solutions", by Berg Cui, senior
quantitative investment analyst, and Jessica Sclafani, further explores the framework
and includes a hypothetical case study on how plan sponsors can
apply its learnings.
ABOUT T. ROWE
PRICE
Founded in 1937, T. Rowe Price (NASDAQ: TROW) helps people around
the world achieve their long-term investment goals. As a large
global asset management company known for investment excellence,
retirement leadership, and independent proprietary research, the
firm is built on a culture of integrity that puts client interests
first. Investors rely on the award-winning firm for its retirement
expertise and active management approach of equity, fixed income,
alternatives, and multi-asset investment capabilities.
T. Rowe Price manages
USD$1.54 trillion in assets
under management as of May 31, 2024,
and serves millions of clients globally. News and other updates can
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and troweprice.com/newsroom.
1 T. Rowe Price,
2024 DC Plan Sponsor Considerations and Actions on Retirement
Income. Specifically, 71% of respondents "strongly agree" or
"somewhat agree" with the statement, "The demographics of our plan
participants are older now versus 10 years ago," and 69% of
respondents "strongly agree" or "somewhat agree" with the
statement, "We want more participants to keep their DC balances in
our plan after they retire."
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SOURCE T. Rowe Price Associates, Inc.