The Retirement Strategy Hiding in Plain Sight

For many investment professionals serving the retirement industry, the primary challenge has shifted from accumulation to decumulation. While the industry has successfully innovated defined contribution (DC) plans with features like auto-enrollment and target-date funds, a critical gap remains: How to convert those accumulated savings into a reliable, lifetime income stream without imposing additional funding burdens on plan sponsors or excessive complexity on participants.

Many participants reach retirement only to face the "Financial Vortex" of competing priorities, often lacking the tools to manage their assets through a 30-year retirement. The traditional approach treats defined benefit (DB) and DC plans as separate, competing silos. However, a powerful solution exists at the intersection of these two frameworks—a “hybrid” solution which draws on elements of both frameworks that is effectively "hidden in plain sight."

The solution is straightforward: Allow retiring participants to roll their DC assets into an existing employer-sponsored DB plan to receive a pension income stream for life. This is not a new, complex investment vehicle or a speculative product; it is a mechanism that has existed quietly for over a decade. By utilizing the institutional scale, and cost efficiency of a DB plan, sponsors can help participants transform a lump sum into a predictable monthly check that is often significantly higher than what they could achieve through retail markets or standard DC drawdown strategies.

The technical foundation for this approach was established by the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) through guidance issued in 2012 and 2014. Specifically, IRS Revenue Ruling 2012-4 outlines the mechanics of rolling over DC assets into a DB plan for subsequent annuitization.

In practice, the process follows a clear path:

1. Election: Upon retirement, a participant chooses to roll over either a portion or all of their DC balance into the employer’s DB plan.

2. Annuitization: The DB plan converts this lump sum into a series of regular, monthly income payments for life.

3. Management: The new liability is managed within the DB plan’s existing asset-liability framework, while the remaining DC assets can stay in the DC plan for liquidity or further investment.

To understand why this matters to investment professionals, one must look at the payout efficiency. Consider an illustrative example with a retiree with $1 million in savings. Based on analysis from May 2025, the difference in annual income generated is substantial:

• The "4% Rule": A standard investment portfolio (60% fixed income / 40% equity) could potentially generate approximately $40,000 annually, indexed for inflation, though still carrying the risk of depleting the principal over 30 years.
• Retail Annuity (SPIA): A single premium immediate annuity purchased in the retail market could potentially yield approximately $70,000 annually (a 7.00% payout rate).

• DB Plan Rollover: Rolling the assets into a DB plan could potentially generate approximately $84,000 annually (an 8.40% payout rate).

  This represents a 20% increase in retirement income compared to a retail annuity and a 120% increase over the 4% drawdown rule.

  These figures are illustrative and not guaranteed. They reflect structural features of DB plans.

Why is the DB plan considered so much more efficient by the industry? The answer lies in the cost structure. DB plans utilize IRS-regulated discount rates and group mortality assumptions, which allow for more efficient pricing than retail products. Because the payments are delivered through an existing plan structure, the solution avoids the high overhead and profit margins associated with retail insurance products. For the participant, it offers simplicity and certainty; for the sponsor, it provides a way to deliver material value at no additional contribution cost or income statement impact, leveraging the synergies of an existing asset-liability framework.

If the ability to roll DC assets into DB plans has existed for over a decade, why hasn't it seen widespread adoption? The answer lies in the historical context of the last ten years. When the IRS and PBGC first issued guidance, most DB plans were significantly underfunded, interest rates were at historic lows, and asset volatility was high. Sponsors were focused on de-risking and were hesitant to take on any new liabilities, even those fully funded by participants.

Today, the landscape has fundamentally shifted. Investment professionals must recognize that the barriers of the past have largely dissolved, making this an opportune moment to revisit the strategy.

One of the most significant change is the financial health of the US corporate pension system. As of the second quarter of 2025, the estimated aggregate funded status for US corporate pensions stood at 104.4%. Many plans are now in a surplus position. Higher interest rates and improved asset-liability matching have allowed sponsors to shift their focus from closing funding gaps to preserving gains and optimizing the value of the plan for participants. In this environment, adding fully funded liabilities through DC rollovers can actually add to plan stability rather than detract from it.

The demand for predictable retirement income is surging as a record number of Americans reach retirement age. Data from the 2024 Goldman Sachs Retirement Survey reveals a stark disconnect: 40% of current retirees receive less than half of their pre-retirement pay, yet only 27% of current workers expect such a shortfall.

Furthermore, regulatory developments like the SECURE Act has signaled a clear legislative intent to prioritize lifetime income solutions. While in-plan annuities within DC plans have been introduced, their adoption has been limited by complexity and fiduciary concerns. The DC-to-DB rollover offers a complementary, institutional-grade alternative that bypasses many of the hurdles associated with retail-style DC annuities.

For practitioners advising plan sponsors, implementation requires a clear understanding of the costs and administrative steps involved:

• Administrative Updates: Setup may require a plan amendment and updates to recordkeeping systems to track rollover contributions separately.
• PBGC Implications: Adding participants to the DB plan will increase the PBGC flat-rate premium, which is $106 per participant for 2025. However, this cost is generally offset by the incremental pension income generated by the fully funded assets.
• Fiduciary Oversight: Although providing an internal annuitization solution is a fundamental objective of a DB plan, it involves different fiduciary considerations than selecting an external annuity provider for a DC plan, an area where sponsors should consult with counsel.

Beyond helping participants, this strategy offers tangible benefits to the plan itself. Because the assets contributed by participants could be expected to earn more (via the plan's expected return on assets) than the liabilities cost (based on interest rates), these rollovers can be a net positive for the plan’s funded status.

Additionally, these liabilities are easy to separate and fully funded, which can support future pension risk transfers (PRT). The strategy is also applicable to frozen or closed DB plans, provided they remain operational, and to cash balance plans, which are classified as DB plans for these purposes.

The DC-to-DB rollover is a powerful, underutilized tool that aligns the interests of participants and sponsors. By moving away from a binary approach to retirement planning and instead optimizing how DC and DB plans can immediately work together, investment professionals can help their clients materially close the retirement income gap. It is a sophisticated yet simple solution that leverages existing institutional strength to provide what retirees want most: dependable, guaranteed income for life.

RISK CONSIDERATIONS
All investing involves risk, including loss of principal.

4% Rule: This rule calculates the withdrawal rate that will allow the investment portfolio to pay a consistent rate the increases with inflation yearly but doesn’t run out money over 30-year period using Monte Carlo simulations. Under the 4% Rule, the initial 4% withdrawal amount increases by inflation to pay out for 30 years. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially.

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