Discussing the topic of introducing guaranteed lifetime income products in defined contribution (DC) retirement plans, Rob Reiskytl, leader of Aon’s national retirement strategy and design team, says a few statistics his firm discovered in a recent survey should be illuminating.
“Our internal polling shows nearly 75% of employers in 2020 say they feel they should or would like to include lifetime income options in their DC retirement plan,” Reiskytl says. “At the same time, 75% of employees say they want access to some form of guaranteed income solution in their DC plan. So there is a consensus building on both sides of the DC plan—among employers and employees—that lifetime income belongs in defined contribution plans.”
This third statistic is even more important, Reiskytl says: Less than 10% of employers currently offer any type of in-plan lifetime income option.
“What’s the disconnection? As your readers know, it has to do with inertia and the history of fiduciary concern in DC plans,” Reiskytl says. “In my view, the SECURE [Setting Every Community Up for Retirement Enhancement] Act should help lifetime income solutions enter DC plans, but the law won’t completely erase certain challenges.”
Solving for Portability
In Reiskytl’s opinion, one big challenge and opportunity coming out of the SECURE Act’s passage will be getting the new portability provisions right.
“The portability thing is interesting and is more important than perhaps some people have suggested, particularly from the employer perspective,” he explains. “Consider the case in which an employer has selected an annuity provider and keeps that insurance firm’s product on their DC plan menu for some time, say five years. What happens when, down the line, the relationship with that insurer ends? What happens to the participants’ assets? What will be the roles and responsibilities of employers in rolling over those assets to another product?”
Building affordable, effective and portable annuity products that fit the needs of employer-sponsored retirement plans covered by the Employee Retirement Income Security Act (ERISA) will be a significant lift for insurance providers, experts agree.
“For my part, I’m optimistic that the insurer community will find a way—and in fact multiple ways—to rise to this occasion and find solutions that are really attractive to the employer and to the employee,” Reiskytl says. “It is also important to acknowledge that, like with any emerging product class, there will be successes and failures. Some providers may change or drop out or consolidate. It’s going to be very dynamic, with a fair amount of innovation.”
Building on Established Frameworks
Reiskytl says stand-alone annuity products may make their way into some plan lineups, but more likely, plans will first investigate the idea of building annuities and lifetime income into a well-understood structure such as a target-date fund (TDF) or perhaps a risk-based fund.
“Overall, I expect we will see sizable demand for lifetime income products in DC plans because of the SECURE Act and the market pressures caused by the Baby Boomer generation entering retirement with more DC plan assets,” he adds. “It’s a potentially very large demand and an incredible opportunity if we do this right.”
Moving forward, Reiskytl concludes, it will be very important for those in the industry to be precise in their discussions of annuities and lifetime income.
“We want to be careful to define terms properly,” Reiskytl says, adding with a laugh that he is a former actuary. “For example, what do we mean by ‘annuitization’? Strictly speaking, that term implies the use of an insured lifetime income solution—meaning it has a guarantee purchased in exchange for money. Some of the solutions we see come into the market might not actually involve annuitization as such in order to be a part of the ‘lifetime income’ discussion.”
Other points that should be clarified for clients are the differences between annuity types—particularly between immediate and deferred annuities, and between single life annuities and joint/survivor products.