Strategy Spotlight

DC Plan Sponsors: It’s Time to Address the Retirement Income Dilemma

Retirement income is an urgent and complex problem. Fortunately, a solution already exists.

The evaluation and adoption of decumulation strategies that address the retirement income dilemma has become a priority for many defined contribution (DC) plan sponsors. However, they have been hesitant to adopt untested solutions. It is no surprise, then, that more than 25,000 DC plans have added PIMCO Income Fund to their plan menus.1 For more than a decade, the fund has sought to deliver maximum current income and long-term capital appreciation. In the following Q&A, Rick Fulford, head of U.S. defined contribution, and Esteban Burbano, fixed income strategist, explain how PIMCO Income Fund seeks to serve the retirement income needs of defined contribution retirees.

Q: WHAT OPTIONS DO RETIREES HAVE FOR SEEKING TO GENERATE INCOME IN RETIREMENT?

Fulford: Most baby boomers rely upon several sources of income in retirement, including Social Security, financial assets (whether from a DC plan or IRA) and defined benefit pensions. However the relative importance of these sources is shifting, with greater emphasis being placed on one’s financial assets.

Social Security remains an essential source of retirement income for most Americans. In many respects, it’s a perfect solution. It hedges both inflation and longevity risks, providing an inflation-adjusted income stream for life.

However, for the average participant, it’s simply not enough. According to the Social Security Administration, Social Security benefits will satisfy only 40% of the average wage earner’s income after retiring – in large measure because the program was designed as a social safety net, not a holistic retirement income solution. In addition, only about 15% of baby boomers have access to a traditional pension benefit. By contrast, 55% have access to a DC plan.2

Therefore, most Americans will come to rely more heavily on financial assets held within their DC plan or IRA for generating income in retirement.

Q: BASED UPON OBSERVED BEHAVIOR, WHAT TYPES OF RETIREMENT INCOME SOLUTIONS DO RETIREES WANT?

Fulford: Retirees value straightforward solutions that seek to generate consistent income and preserve account balances. The preference for income stems from the desire to replace the “paycheck” earned during one’s working years. The preference to preserve account balances reflects the increase in risk aversion one experiences at retirement, driven by the loss of a steady income stream and uncertainty related to one’s future spending needs.

These entirely rational preferences are consistent with an Employee Benefit Research Institute (EBRI)³ study that shows retirees spend largely from income alone and only modestly draw down account balances during their retirement years. Clearly, retirees appear to be following a conservative approach that helps to mitigate longevity risk – the risk of outliving one’s assets.

In addition, retirees place high value on solutions that emphasize liquidity, allowing for control over capital and spending. According to the most recent study from the EBRI, at a ratio of 5 to 1 retirees prefer retirement income solutions that emphasize access and control over those that sacrifice flexibility in exchange for income guarantees, even if it means giving up guarantees.

Why is this? Most retirees are not well-equipped to forecast the makeup and magnitude of their future consumption needs and therefore prefer solutions that allow them to adapt to their evolving situation.

This, in addition to behavioral biases, largely explains the limited retiree adoption of guaranteed solutions, specifically immediate and deferred income annuities, within DC plans.

Taking into account these behavioral preferences, an attractive retirement income solution should target a consistent income stream, aim to protect capital, and provide liquidity.

Q: WHAT DOES THIS MEAN FOR PLAN SPONSORS DEVELOPING A RETIREMENT INCOME TIER? SHOULD THEY SEEK AN ALL-IN-ONE INCOME SOLUTION OR MULTIPLE SOLUTIONS?

Fulford: Many plan sponsors are considering adding multiple strategies to their retirement tier – some focused on single asset classes, others that combine multiple asset classes. This could be sensible, as retirees, who tend to be the most engaged participants within a DC plan, prefer to select their portfolios and will likely value some degree of choice in seeking to satisfy their particular needs.4

According to Cerulli Associates, plan sponsors consider a fairly wide set of solutions for delivering retirement income, but focus on fixed income more than any other asset class, followed by target-date funds. In contrast, few plan sponsors consider retirement income solutions that offer annuity-based guarantees (see Figure 1).

The focus on bonds is understandable because a highly diversified, high-yielding multi-sector bond portfolio can provide many of the key characteristics that participants desire – including the potential for investment income, modest growth potential and capital preservation.

DC Plan Sponsors: It’s Time to Address the Retirement Income Dilemma

Q: HOW COULD PIMCO INCOME FUND WORK AS PART OF A RETIREMENT INCOME SOLUTION?

Burbano: While the industry is hard at work developing multiple retirement income solutions, adoption of such strategies may still be years away. After all, implementation will require market education, plan sponsor diligence, and successful track records over three to five years.

PIMCO Income Fund is an income-focused multi-sector bond strategy that could be a solution for plan sponsors seeking to implement a retirement tier. It solves for many of the needs expressed by DC participants in retirement:

  • It’s straightforward: The Income Fund is a straightforward strategy that is simple for plan sponsors to implement and is easily communicated to participants.
  • It seeks to provide maximum current income: The fund has delivered consistent monthly distributions over the past 12 years.5
  • It seeks to preserve capital: The fund has an emphasis on capital preservation and seeks long-term capital appreciation as a secondary objective.
  • It’s been widely adopted by plan sponsors: The Income Fund is now offered in more than 25,000 defined contribution plan menus, up from 4,000 just five years ago.6

Q: HOW HAS PIMCO INCOME FUND PERFORMED AS A POTENTIAL RETIREMENT INCOME SOLUTION?

Burbano: Over most time periods, PIMCO Income Fund has delivered outcomes important to retirees, including 1) strong total returns, 2) consistent income, and 3) capital preservation.7 In addition, for a hypothetical retiree following the 4% consumption rule (spending 4% of their starting wealth adjusted for inflation each year), PIMCO Income Fund has delivered a consistent income distribution (see Figure 2), which would have been able to satisfy the retiree’s monthly consumption needs entirely through income, without drawing down principal.

Q: CAN YOU DESCRIBE IN A BIT MORE DETAIL THE STRATEGY THAT UNDERLIES PIMCO INCOME FUND?

Burbano: PIMCO Income Fund is managed with two key objectives in mind: maximizing current income and long-term capital appreciation. We take a long-term view, and use a balanced approach in seeking to meet these objectives across different market environments. We allocate across higher-yielding assets that tend to do well in positive economic scenarios, and high quality assets that tend to help mitigate the downside in risk-off scenarios.

PIMCO Income Fund invests globally and across sectors, and has the flexibility to manage the two key risks that typically exist in a bond portfolio – duration risk and credit risk – all while seeking to deliver maximum current income. The fund manages duration actively, which has helped it to navigate challenging interest rate markets over the past 10 years. It has sought to diversify credit risk via broad exposures, aiming to enhance value and preserve capital in periods of market stress.

We draw on the full breadth of PIMCO’s resources – including more than 255 portfolio managers and over 65 analysts as of 20 June 2019, who cover various sectors of the fixed income markets from offices around the world. These teams of specialists are continuously sourcing the best ideas from every sector and feeding recommendations to the Income Fund’s lead portfolio managers.

This structure allows the Income Fund to implement ideas from different sectors and regions in an effort to build a portfolio that targets an attractive yield while mitigating downside risk.

DC Plan Sponsors: It’s Time to Address the Retirement Income Dilemma

For the most recent quarter-end performance data for PIMCO Income Fund, please click on the link below:


Click for the "Income Fund summary prospectus."

DC Plan Sponsors: It’s Time to Address the Retirement Income Dilemma

Read more about PIMCO income strategies here.

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1 Brightscope, p. 1
2 PEW Research, p. 1
3 EBRI/Greenwald 2019 Retirement Confidence Survey Summary Report published 23 April 2019, p. 2
4 Brightscope, p. 2
5 The fund has issued a dividend distribution for each month since inception. No guarantee is being made that a future dividend will be issued, p. 3
6 Brightscope, p. 3
7 The fund has issued a dividend distribution for each month since inception. No guarantee is being made that a future dividend will be issued, p. 3
The Author

Esteban Burbano

Fixed Income Strategist

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This material is authorized for use only when preceded or accompanied by the current PIMCO funds prospectus or summary prospectus, if available.

Past performance is not a guarantee or a reliable indicator of future results.

The performance figures presented reflect the total return performance and reflect changes in share price and reinvestment of dividend and capital gain distributions. All periods longer than one year are annualized. The minimum initial investment for Institutional, I-2, I-3 and Administrative class shares is $1 million; however, it may be modified for certain financial intermediaries who submit trades on behalf of eligible investors.

Differences in the Fund’s performance versus the index and related attribution information with respect to particular categories of securities or individual positions may be attributable, in part, to differences in the pricing methodologies used by the Fund and the index.

Investments made by a Fund and the results achieved by a Fund are not expected to be the same as those made by any other PIMCO-advised Fund, including those with a similar name, investment objective or policies. A new or smaller Fund’s performance may not represent how the Fund is expected to or may perform in the long-term. New Funds have limited operating histories for investors to evaluate and new and smaller Funds may not attract sufficient assets to achieve investment and trading efficiencies. A Fund may be forced to sell a comparatively large portion of its portfolio to meet significant shareholder redemptions for cash, or hold a comparatively large portion of its portfolio in cash due to significant share purchases for cash, in each case when the Fund otherwise would not seek to do so, which may adversely affect performance.

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Although the Fund may seek to maintain stable distributions, the Fund’s distribution rates may be affected by numerous factors, including but not limited to changes in realized and projected market returns, fluctuations in market interest rates, Fund performance, and other factors. There can be no assurance that a change in market conditions or other factors will not result in a change in the Fund’s distribution rate or that the rate will be sustainable in the future.

For instance, during periods of low or declining interest rates, the Fund’s distributable income and dividend levels may decline for many reasons. For example, the Fund may have to deploy uninvested assets (whether from purchases of Fund shares, proceeds from matured, traded or called debt obligations or other sources) in new, lower yielding instruments. Additionally, payments from certain instruments that may be held by the Fund (such as variable and floating rate securities) may be negatively impacted by declining interest rates, which may also lead to a decline in the Fund’s distributable income and dividend levels.

There is no assurance that any fund, including any fund that has experienced high or unusual performance for one or more periods, will experience similar levels of performance in the future. High performance is defined as a significant increase in either 1) a fund’s total return in excess of that of the fund’s benchmark between reporting periods or 2) a fund’s total return in excess of the fund’s historical returns between reporting periods. Unusual performance is defined as a significant change in a fund’s performance as compared to one or more previous reporting periods.

A word about risk:

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features.

Bloomberg Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. The ICE BofA Merrill Lynch U.S. High Yield BB-B Rated Index is an unmanaged market index comprised of various fixed income securities rated BB and B. It is not possible to invest directly in an unmanaged index.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO.

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