Practice Management December 1, 2022

Momentum is Growing to Educate Advisers on Plan Options for Lifetime Income

Retirement industry groups are ramping up efforts to help advisers understand and compare annuities for plans and consider how to communicate those options to plan sponsors and participants.
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Three years after the Setting Every Community Up for Retirement Enhancement Act made it easier for companies to add annuities to their retirement plan options, the momentum is growing for educational programs in this area that are tailored to the needs of advisers.

New and existing players in the market have ramped up efforts to help advisers understand and compare annuities for plans and consider how to communicate those options to sponsors and individuals.

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Efforts include deep-dive webinars and events, the development of a methodology and a professional development certificate that advisers can earn on retirement income.

“There hasn’t been a lot of practical education on what’s needed to fulfill the annuity safe harbor requirements in the SECURE Act,” says John Faustino, the head of Fi360, a Broadridge company, which trains financial advisers how to be fiduciaries and set up the Retirement Income Consortium. “We’re seeing a lot of questions about why lifetime income, fiduciary requirements, and differentiating yourself as an adviser around this knowledge.”

Another reason behind the new focus on lifetime income is lawmakers in Washington, says Brendan McCarthy, senior managing director and head of Nuveen Retirement Investing.

“Defined contribution plans were initially meant to supplement defined benefit plans,” McCarthy says. “But what ended up happening is that many corporations did away with defined benefit altogether. Now Washington is dealing with this massive generation of employees that are retiring from the corporate sector without lifetime income. There’s $8 to 9 trillion sitting in the U.S. 401(k) system. This is the opportunity for employers to offer lifetime income to corporate employees through annuities via their existing 401(k) plans.”

Taking on Lifetime Income

The Retirement Income Consortium that Broadridge organized is spearheading retirement income education via webinars for financial advisers, plan sponsors and other financial intermediaries.

It is also developing a due diligence methodology for evaluating retirement income solutions within defined contribution plans, including tools to help advisers document their decision process so they can substantiate what they have done and have protections.

According to Faustino, a software due diligence tool based on the consortium’s work will be available by Broadridge and available in 2023. The written methodology will be free of charge, while there will be a license associated with the related software. Developed together with ERISA attorneys and other experts in the field, the tool will provide legal and regulatory background to help advisers ensure they are following the correct guidelines when selecting and monitoring retirement income options.

Faustino says, “One of the biggest challenges with retirement income today, and lifetime income in particular, is that there is not a standard database with information on all of these lifetime income offerings. One of the things that the consortium has done – and we reflect this a bit in our methodology, our due diligence documentation – is identify what the common characteristics are across all the retirement income types. This is necessary to make a prudent comparison of one option versus another.”

Some of the largest asset managers and insurers in the world are supporting the Retirement Income Consortium. Members include: AllianceBernstein, Allianz Life and BlackRock.

Faustino says, “Asset managers and insurers are very much interested in standardizing and normalizing the evaluation of these offerings because they realize first and foremost that there is a real market need out there with longevity risk on the rise and the demise of defined-benefit plans.”

He added, “If we don’t make it easy for advisers to work with retirement income solutions, they won’t adopt them.” 

Waiting Game for In-Plan Annuity Use

As tools for evaluating lifetime income options slowly become available, and advisers learn how to use them in their processes, the focus in the industry is on educating employers and employees on what lifetime income solutions look like and how they can benefit a plan, McCarthy says.

That’s a good thing to do while the industry ramps up with plan-based annuities. It could be a while because it’s a complex process to build third-party annuities into a plan and calculate their lifetime value on a daily basis to display it to employees.

For this reason, and because the general public needs to be educated on annuities, the default option in plans is really important, says Tamiko Toland, managing director, head of lifetime income strategy and market intelligence at TIAA.

“Advising is very time consuming and requires that the saver actively engages, whether that is inside or outside of the plan,” she says. “That usually means that participants don’t get that advice they need. Defaults are the pathway to improving retirement security.”

McCarthy says the retirement industry moves slowly but consultants move fast since they want to grow their businesses. “There’s a tremendous opportunity right now for consultants to learn about these income solutions that are coming to market,” she says. “Even though most of them are not currently available on most platforms, it’s a benefit to learn about them now.”

Demand From Individuals for Advice and Solutions

Goldman Sachs recently surveyed working individuals and retirees about retirement. It found that the top concern of current workers was retirement income. “For a plan sponsor or adviser, there’s a growing demand for them to provide advice, guidance and solutions,” says Mike Moran, senior pension strategist at Goldman Sachs Asset Management. Moran works in the client solutions group within the asset management division of Goldman Sachs advising plan sponsors as well as financial advisers.

The survey found that retirees prefer retirement income be consistent and stable (42%) and guaranteed for life (41%). A significant percentage (76%) of retirees says they would like to receive at least half of their retirement income from guaranteed sources, including Social Security, but many are coming up short with only 55% of retiree respondents achieving this goal.

Wade Pfau, CFA, a professor of retirement income at The American College of Financial Services, has been researching retirement income styles. He has found that two thirds of those surveyed want something other than an investment-only approach to managing their assets.

 “People don’t really know how to structure a retirement spending plan,” he says. “The investing problem changes after people retire, but they may not always realize that. When annuities are inside plans, participants have a sense of ease. They’re not left on their own to deal with a million different options.”

Savers With Advisers More Likely to Have Annuities

The most recent Spending in Retirement Survey by the Employee Benefit Research Institute (EBRI) shows that a majority of respondents (73%) do not own an annuity or a product that guarantees monthly income for life.  Those working with an adviser, however, were twice as likely to have a guaranteed monthly income product as an income source in retirement, according to Bridget Bearden, a research and development strategist at EBRI.

In addition, EBRI asked respondents if they were planning to convert any of their current income sources into guaranteed income in an insurance product. A subset of the 2,000 people surveyed were posed the question, and only 3% says they were planning on doing so.

“We see that just over half of the people who are asked this question say no. But when we look at those with higher income, they’re more likely to be saying yes,” Bearden says. “Similarly, when you look at those with advisers, people were two times as likely relative to the overall population to say yes they planned to convert their income into guaranteed income.”

“You can definitely see the impact of an adviser,” Bearden says. “Working with an adviser or having an adviser come and educate your participant population is going to increase awareness of the strategy.”

Yet Bearden cautions that the research does not indicate if more awareness or education will lead to greater utilization of annuities. “Being aware of annuities and truly understanding how annuities work are different things,” she says.

Practice Management November 29, 2022

Financial-Market Upheaval Overtakes Best Intentions of Pension Legislation

Pension plan balance sheets improved in 2022 despite market fluctuations. Now corporate plan sponsors have to consider their funding strategy for the year ahead.
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On March 11 of 2021, President Joe Biden signed into law the American Rescue Plan Act, offering relief for corporate employers struggling with higher pension contributions—the legacy of years of near-zero interest rates.

Everything is quite different today. The 10-year note topped 4% in early November (it has since fallen), and concerns about rising interest rates have sent stocks swooning this year. The ARPA pension provisions are nearly meaningless, and the seismic market shift has led to big changes in the pension plan industry, with more likely to follow.

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Nevertheless, according to Milliman’s monthly records, the plan funded ratio through October was 112.8%, with a funded status surplus of $163 billion.

“At the end of 2022, balance sheets will have greatly improved,” says Zorast Wadia, a principal and consulting actuary with Milliman. “That begs the question: What should be your pension funding strategy going forward?”

For many corporate plan sponsors, the answer is some sort of risk management scheme. In the second quarter of 2022, pension buyouts topped a fresh record, according to data from LIMRA. As previously reported, those numbers include heavyweights like IBM.

While it is largely some jumbo transactions that are helping goose the numbers, there is much more appetite among plan sponsors now that funded status has improved so drastically, says Michael Clark, managing director and consulting actuary with Agilis Partners LLC.

“In 2020 and into 2021, a lot of plan sponsors still looked at pension risk transfer as potentially cost prohibitive,” Clark said. With funding status much improved, this now looks like a perfect moment to shed risk.

“There’s definitely a disconnect” between the relief promised by ARPA and strategies like pension risk transfers and liability-driven investing, according to Clark.

“Relief is structured to protect companies, when rates are low, from having a spike in liabilities,” says Clark. “When rates are higher, there’s more reason to consider those strategies. What we’re going to see in 2023 is that relief is no longer relief,” as rates have spiked higher.

There is also likely to be more take-up of strategies around liability-driven investing, says Randy Cusick, managing director at SEI Institutional Group. “A lot of clients are saying, ‘It’s time to start hedging interest rate risk.’”

In the immediate aftermath of ARPA’s passage, some sponsors reallocated toward riskier assets, Cusick notes, taking advantage of the longer funding time horizon offered by the legislation. He expects more reallocating to take place as sponsors assess the changed market conditions.

Milliman’s Wadia thinks this is a perfect moment for sponsors to consider LDI. “Funding relief has allowed plan sponsors to invest more conservatively,” he says, since they’re no longer trying to make up for shortfalls. Instead of risk transfer, “shift from equities to fixed income over time, thereby solidifying your funded status even more.”

Perhaps more important, Wadia says, is trying to avoid the same mistakes made in the late 1990s, the last period in which corporate pensions flourished, that later led to shortfalls. “We’re seeing the same conditions now that allowed plans to flourish back then,” Wadia says. “You want to avoid some of the plan design features that caused them to have to be frozen.”

This is a good time to restructure plans to avoid the highly leveraged final average pay designs found in traditional DB plans, Wadia says, in favor of a better cost-sharing relationship between employer and employee, as found in many hybrid structures such as cash balance plans.

Clark agrees. If anything, he thinks, ARPA did give sponsors time to consider their options.

“The interesting thing will be to watch what sponsors do in terms of rebalancing once it seems like we’ve turned the corner,” Clark says. “Given the economic environment, it’s not unfathomable that we would see sponsors evaluate their asset balance strategy to capture any upside, while keeping in mind how much they want to keep allocated to LDI.”

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