Employers Built the Retirement On-Ramp. The Off-Ramp Is Still Missing.

Employers have spent 40 years getting it right, making retirement savings easy. Auto-enrollment, auto-escalation and target-date defaults turned human inertia from an obstacle into an asset, and participation rates prove they worked. Success was measured by whether employees accumulated a balance, but retirement income planning was not part of the solution.

The ‘Peak 65’ Problem

The U.S. is in the “Peak 65” zone. A record 4.18 million Americans turn age 65 each year through 2027, and more than half arrive with $250,000 or less in assets. Employees retire with retirement savings they have been trained their entire working lives to protect, and yet, many have almost no framework for spending. Research from the Institutional Retirement Income Council (IRIC), a nonprofit financial wellness think tank, shows:

• Only 28% of pre-retirees and retirees say they are comfortable drawing down their savings.
• Just 29% of pre-retirees over age 55 have any withdrawal plan at all.
• And, 38% underspend to preserve a nest egg they saved to spend.

It’s a behavioral issue and entirely predictable.

A lifetime of “save more, spend less” doesn’t switch off on a retirement date. The paycheck that arrived every two weeks without anyone thinking about it simply stops, and the retiree must now create one. According to IRIC research, 56% of retirees fear they will run out of money, while only 6% worry about leaving money behind, which all but guarantees underspending. Layer on sequence-of-returns risk, systematically underestimated longevity and the sheer volume of sequencing decisions, and paralysis becomes a rational response to the complexity. Then, there is the part no account balance addresses: Work supplies structure, status and social connection, and retirement removes all three on the same morning.

None of this is the employee’s fault, and none of it is beyond a plan sponsor’s control.

Constructing the Off-Ramp

Now is not the time for employers to sit still. Six moves could well change the outcome.

Stop treating the retirement date as the exit. Many plans still make staying harder than leaving. Adding systematic withdrawal and installment options and removing the friction that nudges separated participants toward a rollover keeps retirees within institutional pricing and fiduciary oversight.

Consider adding guaranteed income options to the plan and using the safe harbor Congress provided. The SECURE Act’s annuity selection safe harbor, extended by SECURE 2.0’s portability provisions, is designed to give fiduciaries the confidence to act. Evaluate in-plan income solutions for cost, portability and insurer strength using a documented process, applying the same rigor as any investment decision. The payoff is behavioral as much as financial: IRIC research found retirees spend roughly twice as much of their guaranteed income as they do of an equivalent pot of savings. Guaranteed income is a good insurance against longevity.

Extend retirement plan advice beyond the accumulation years. Most financial wellness programs target younger generations who need to boost their retirement savings. The highest-stakes, least-reversible decisions cluster in the five years on either side of retirement:

• When to claim Social Security;
• How to sequence withdrawals across accounts;
• What Medicare covers; and,
• How to build a household budget without a paycheck.

Implementing robust pre-retiree counseling and education programs for the 55-plus cohort is essential.

Ask your plan recordkeeper to lead participant communications with retirement income projections, not a total balance. A statement showing a projected monthly paycheck, rather than a lump sum, is the most effective reframe. People can’t effectively plan for retirement income with only a total savings balance.

Offer phased retirement. A gradual reduction in hours eases the financial transition and, just as importantly, the transition of identity. It also helps employers retain institutional knowledge they would otherwise lose all at once.

Finally, change what you count. If retirement plan health is measured by participation rates and average balances, sponsors will keep optimizing for a problem that’s already solved. Retirement income readiness and projected income adequacy are harder to measure but are important indicators of whether the retirement savings program ultimately worked.

Some will argue that this exceeds a plan sponsor’s duty — that what a retiree does with the money isn’t the employer’s business. That argument had more force when defined benefit plans carried the risk. Having shifted that risk onto employees, you don’t get to declare the job finished when it becomes hardest.

Employers built the on-ramp. The off-ramp is the work that remains.

Editor’s Note: Additional Content

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