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The Great American Challenge: Retirement Income for Everybody

The affluent are well served by today’s retirement-income structure, but not everyday workers.

From Accumulation to Income

The United States has laid the groundwork for retirement accumulation. The formula consists of Social Security + 401(k) accounts, supplemented by additional savings for wealthier employees. Admittedly, the 401(k) network is incomplete, being unavailable to one third of private-sector workers, but 401(k) access could readily become universal by modifying the regulations.

The beauty of the retirement-accumulation approach is its simplicity. When 401(k) plans feature automated enrollment, employees succeed by doing nothing. Both their projected Social Security payments and the value of their 401(k) accounts quietly increase, with the latter typically invested in a highly diversified target-date fund that requires little investor attention. The machine runs itself.

Not so when retirement arrives. The Social Security benefit is straightforward, aside from the choice of when to begin, but converting lump sums into income is devilishly complex. Use the assets to buy an immediate annuity, thereby avoiding investment decisions? Spend some of the monies on a deferred annuity, for longevity protection, while keeping the rest invested? Skip annuities altogether?

With the investments themselves, preserve capital while spending its income? Adopt a total-return approach that involves regularly drawing down capital? If so, how much capital, what should be the asset allocation, and how flexible should be the withdrawal rates, should the markets perform poorly? Place the assets in a single portfolio, or separate them into several buckets, each of which is designed to meet a different investor need?

The Happy Few

Financial advisors answer those questions. They are paid to tailor solutions that reflect each retiree’s preference. For example, while some investors cherish the security provided by annuities, others shun them, because buying annuities means losing control of those assets. Experienced advisors recognize the differences among their clients, making their recommendations accordingly.

Regrettably, such advisors cannot serve the masses. Their services require time and expertise and thus are too costly for smaller accounts. Michael Kitces relays the story of a financial planner who explained his occupation to a Philippine citizen. The response: "Wow, you folks have so much money that you can hire somebody to tell you what to do with it." Exactly. Traditional financial advice suits the relatively wealthy, but it fails everyday retirees.

Potential Solutions

In response to this need, the marketplace has developed two innovations: 1) digital advice, and 2) new retirement-income products. A third possibility is to extend the 401(k) framework so that it covers employees from job to grave.

1) Digital Advice

This approach has made the largest inroads. Delivering retirement-income counsel electronically (or by telephone) is an inevitable outcome of the technology revolution. No longer must financial experts hold individual meetings, dispensing their knowledge one client at a time. Instead, they can build systems to clone their insights, thereby serving more investors at a lower cost.

Various parties have made the attempt, including traditional advisory firms, discount brokers, and venture-capital upstarts. Adoption has been moderate. An October 2020 list of digital-advice providers (which admittedly, omits the efforts of the traditional advisory firms) estimates the industry size at $320 billion--about 0.3% of the value of U.S. stocks and bonds. Of that figure, more than half comes from Vanguard's program, which was seeded by existing Vanguard assets.

While it’s too early to conclude that digital advice will not become the mass solution, there are concerns. The major hurdle is that it requires investor activity. Even at its most streamlined, digital advice demands participation from its customers. As the 401(k) industry has shown, many workers dislike confronting their retirement realities. They will go to great lengths to avoid such experiences.

(True, those who hire full-service advisors spend time on the endeavor. But part of the reason they do so is because the relationship is personal. Also, because they are wealthier, their retirement-income news is relatively pleasant.)

2) New Retirement-Income Products

I had high hopes for these. In 2007, Fidelity introduced a mutual fund series called Income Replacement. The following year, Vanguard and Schwab launched Managed Payout and Monthly Income funds. The names differed, but the goals were identical: Provide single-fund solutions that delivered income for retirees who possessed investments with the aim of supplementing their Social Security and/or pension benefits but who lacked sufficient assets to hire financial advisors.

The sponsoring fund companies were the right organizations, being industry leaders. Unfortunately, the time was very much wrong. As anybody who has studied retirement withdrawal rates can attest, the worst outcomes occur when stocks crash at the beginning of the withdrawal period. That is what happened, in a big way through the 2008 financial crisis, and the funds never recovered. Eventually, Fidelity and Vanguard merged their offerings. The Schwab funds remain alive but just barely, commanding a piddling $250 million.

I still like the idea. Such funds permit retirees to pool their resources, while also permitting them to redeem their shares on command. Unlike with annuities, the purchase decision is not final; the investor continues to own those assets. And unlike with digital advice, the process is exceedingly simple. Buy the fund, spend the income distributions, and forget about the rest.

However, if such funds ever do find favor, it will not be anytime soon. That three behemoths couldn’t sell the concept has understandably frightened others from launching such funds. It will take a while for the memory of that marketing failure to fade.

3) Extending 401(k)s

The most logical scheme is to expand the scope of 401(k) plans. Rather than assume that retirees will shift their workplace assets into individual retirement accounts, enhance the 401(k) structure so that it becomes the best solution for most retirees. Of course, those with greater wealth may decide to leave the system to receive customized advice, but rank-and-file employees will stay put.

This could be accomplished by defaulting retirees into investments that are more standardized and better defined than today's "retirement income" funds, which vary widely and are not well understood by their shareholders. For example, one could default new retirees into structured products that protect against significant capital losses, while paying a competitive interest rate (such a combination is possible, if the investor foregoes stock market gains).

Over time, as the retiree better understands her financial situation, she could select other options, such as annuitizing a portion of the assets or buying a conservative allocation fund that would increase market risk but also improve the chances for capital appreciation. But that could come later. On the retirement date, the process would be automated unless the investor chose otherwise.


With retirement accumulation, businesses were given an inch of daylight through Section 401(k) of the IRS Tax Code. They seized the opportunity. The same can and should occur with retirement income. The need exists. What remains is for market ingenuity to align with investor demand. Regrettably, that has not yet occurred with mainstream retirement-income services.

John Rekenthaler ( has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar’s investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

John Rekenthaler

Vice President, Research
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John Rekenthaler is vice president, research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Rekenthaler joined Morningstar in 1988 and has served in several capacities. He has overseen Morningstar's research methodologies, led thought leadership initiatives such as the Global Investor Experience report that assesses the experiences of mutual fund investors globally, and been involved in a variety of new development efforts. He currently writes regular columns for and Morningstar magazine.

Rekenthaler previously served as president of Morningstar Associates, LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. During his tenure, he has also led the company’s retirement advice business, building it from a start-up operation to one of the largest independent advice and guidance providers in the retirement industry.

Before his role at Morningstar Associates, he was the firm's director of research, where he helped to develop Morningstar's quantitative methodologies, such as the Morningstar Rating for funds, the Morningstar Style Box, and industry sector classifications. He also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

Rekenthaler holds a bachelor's degree in English from the University of Pennsylvania and a Master of Business Administration from the University of Chicago Booth School of Business, from which he graduated with high honors as a Wallman Scholar.

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