Bear Markets and DC Plan Drawdown Strategies

One silver lining in the economic fallout of the coronavirus pandemic in the United States is the opportunity to re-educate people about risk and the role of guarantees.

The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act at the end of last year represented a significant victory for retirement plan industry lobbyists and advocacy organizations.

At the time, they suggested the law’s in-plan annuity selection safe harbor for plan sponsors has the potential to “normalize” the use of annuities in 401(k) plans—as does the law’s requirement that plan sponsors furnish regular lifetime income projections to their employees. And by normalize, they really mean “dramatically increase.”

Several months later, the coronavirus pandemic has, at least for the time being, entirely eclipsed the industry’s discussion of the SECURE Act. The human toll of the virus has been massive, as has the economic damage. Many plan sponsors, for this reason, are more focused on expanding the hardship withdrawal and loan provisions in their plans, or perhaps contemplating layoffs or furloughs, meaning the in-plan annuity discussion has taken a back seat.

This situation is a setback but also an opportunity for in-plan annuities, says Barbara Delaney, a principal at StoneStreet Renaissance LLC, which was acquired in 2019 by HUB International. Simply put, guaranteed income starts to look pretty darn attractive when asset managers start speaking about a sustained recession or even an outright depression.

“One silver lining in these down markets is that this sort of situation leads people to realize how much they need guarantees when it comes to building a sustainable lifetime income strategy, even with Social Security,” Delaney says.

In Delaney’s experience, the vast majority of people are making the mistake of claiming Social Security early, and for that reason, advisers can make an immediate difference by teaching people how to create a “bridge strategy,” wherein they rely on their individual private savings to fund their expenses between retirement and the full Social Security claiming age. High quality, institutionally priced annuities can be an important part of that bridging strategy, Delaney explains.

While such services are less a part of her current role as a wealth manager at Creative Planning, Paula Hogan gained extensive experience using annuities as part of her retirement-focused clients’ decumulation strategies during years of independent practice.

“It was actually a standard part of our decumulation approach,” Hogan explains. “Our approach was basically to help clients gradually build up layers of income insurance over time—rather than to do a big annuity purchase prior to the retirement date.”

This annuitize-slowly-over-time strategy means investors are protected from sequence of returns risk—i.e., they won’t have to rely on the market being healthy close to their retirement date in order to make a big one-time annuity purchase at an attractive rate. The past month has demonstrated the prudence of this approach, Hogan says.

“Our goal was to build a floor of income over time that would meet peoples’ demonstrated fixed expenses, thus freeing up the rest of their assets for discretionary purposes and additional investing throughout retirement,” Hogan explains.

In his role as a senior investment consultant at Willis Towers Watson, David O’Meara works predominantly with large defined contribution (DC) plan clients. Until the past few years, the topic of “in-plan annuities” was pretty much a non-starter for most plan sponsors, even the largest and most sophisticated, but that picture is slowly changing.

“The topic of annuities is increasingly important in my work with DC plans,” O’Meara says. “More and more people are DC plan-only investors these days, which only raises the stakes in this whole conversation about retirement income. As your readers know, these plans just haven’t been designed as retirement spending vehicles. They are very powerful accumulation vehicles, but they have not been optimized to help people manage their finances in retirement.”

O’Meara says that at this stage, the DC plan adviser’s or consultant’s role starts with education and coordination. With the coronavirus pandemic, it may take a while before plan sponsor clients are ready to return to contemplating in-plan annuities, but that just means advisers have more time to educate themselves on this critical topic.

“To deliver annuity options to retirement plan participants, it requires the plan sponsor working in concert with the plan provider and asset managers to get the necessary infrastructure in place,” O’Meara says. “This is true whether we’re talking about in-plan annuities, a bidding service or any other approach. Advice is one thing, but when it comes to delivering actual products, this is not something an adviser or consultant can just implement as a simple value-added solution.”

Still, the lift should be doable when advisers, sponsors, recordkeepers and asset managers work in concert, sources agree.

“That’s where my relationship with Kelli Hueler and her firm Income Solutions comes in,” Delaney says. “They provide a platform that allows us to deliver competitively priced, high quality institutional annuities to retirement plan investors. People like her platform because it provides competition, standard pricing and feature comparisons. These features are essential when it comes to delivering annuities, in my view.”

Delaney notes that it has been challenging to bring the Income Solutions platform down to the middle market—let alone to the small-plan marketplace. In large part, that’s because it takes work from the recordkeeper to integrate the annuity solution, and they either can’t or won’t take the time to do so for every small client. As Delaney explains, recordkeepers also have an incentive to keep the focus on their own proprietary retirement income solutions, be they guaranteed or not.

“We have had some mid-sized and larger clients successfully demand that their recordkeepers put this annuity purchase feature directly on the participant website, but even in those cases they don’t tend to prominently display the feature—and there are actually some recordkeepers out there that flatly refuse to implement this type of solution,” Delaney says.

Delaney says she has found various creative ways around this challenge, but it requires an engaged plan sponsor and participant population. One potential solution is for the plan sponsor to create its own website adjacent to the recordkeeper’s, where participants can go to purchase annuities with plan assets.

“Communicating about annuities can’t be a one-and-done thing, either,” Delaney says. “You need to educate participants about their options well before their retirement date, so that when they are getting into the red zone, they are well-informed about the guarantees they can purchase.”

O’Meara expects to see debates around and implementations of solutions, which include immediate annuities, laddered bond portfolios, target date-fund (TDF) glide paths featuring systematic withdrawals, managed payout funds, TDFs with a deferred annuity component, and TDFs with guaranteed minimum withdrawal benefits.

“There are more solutions on the market today than ever before that are ready to be implemented in our space and which don’t involve tremendous amounts of money or time,” O’Meara suggests. “Companies have been offering guaranteed solutions incorporating insurance for decades. These are not new products or really new ideas, they’re just new to the 401(k) world. Many solutions have been out in the marketplace and have very strong track records.”