Despite Reservations, Sponsors’ Interest in Annuities is Growing

Advisers should be educated about annuities and how to analyze them to help plan sponsors decide the best products to use.

There is a dichotomy among retirement plan sponsors when it comes to offering annuities in defined contribution (DC) plans, speakers said during a Broadridge webinar held Thursday, “How Annuities Can Fit Into a Fiduciary’s Planning Process.”

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On the one hand, many sponsors have reservations about offering annuities—yet on the other hand, a majority are curious about annuities and are watching regulatory and product developments as they pertain to DC plans, the speakers said.

Seventy-five percent of sponsors think in-plan annuities would create administrative complexities for both them and their recordkeepers, according to a Willis Towers Watson survey, said Michelle Richter, principal of Fiduciary Insurance Services. Sixty percent think the current products in the market are either too complex or risky, as their results have not been proven in DC plans, Richter added.

Fifty-eight percent think participants investing in them may face portability issues, even though the Setting Every Community Up for Retirement Enhancement (SECURE) Act addressed that, she said.

Another 61% think their fees are too high, even though the institutional pricing is less than what a retail investor would pay, and 56% think they are not transparent enough, Richter said.

Yet, in spite all of this, 63% are actively monitoring future developments in guaranteed income products, she said.

“Plan sponsor interest in retirement income is increasing for a number of reasons,” Richter said. “Seventy-four percent are worried about an aging workforce and increasing longevity, and 74% are interested in retirement income options because of their company’s focus on retirement readiness.

“Sixty-seven percent cite workforce planning challenges,” she continued. “Forty-nine percent say the reason is the massive shift away from defined benefit [DB] plans to defined contribution plans as the primary retirement plan, and 70% point to regulatory actions to encourage delivery of lifetime retirement income.”

The best way for plan sponsors to determine if they should consider retirement income options is to decide if the products would help them manage their human resources (HR) and save money and if they would be a priority for the firm, she said.

There are primarily two types of annuities, as CANNEX views them: savings and income annuities, said Tamiko Toland, director, retirement markets, CANNEX. Each type of annuity has a different risk/reward, Toland said.

“Where there is the most talk about implementing annuities in 401(k)s is on income annuities,” she said. “If a person defers the time when they will begin taking the income, perhaps into their 70s or their 80s, they can purchase the annuity for less. This will provide more efficient benefits and will enable people to have a more concrete planning horizon for the rest of their assets.”

Currently, less than 10% of retirement plans offer an in-plan guaranteed solution, according to Callan, Richter said.

The insurance industry is hopeful that the SECURE Act 2.0 might permit plans to use qualified longevity annuity contracts (QLACs) as the qualified default investment alternative (QDIA), which would result in wide acceptance of in-plan annuities, she said.

Also, when participants begin seeing their balances translated into monthly or annual retirement income in September, through a single life annuity for individuals and a joint survivor annuity for couples, as mandated by the SECURE Act, Richter said, the industry expects this will pique participants’ interest in annuities.

It will be important for retirement plan advisers to learn about the value of annuities, as many QDIAs charge single basis points, whereas an annuity can be more than 100 basis points, Richter said.

“For advisers who haven’t historically been working with annuities, it can be hard to substantiate the value proposition of an annuity, as our world becomes more and more litigious,” she said. “We need to help educate the consulting community to feel more confident about this. We also need to help educate them on how to do a cost/benefit evaluation when selecting a contract. The best choice isn’t necessarily the lowest cost contract.”

Another way that plans might begin embracing annuities is in target-date funds (TDFs) or through managed accounts, Toland added.

Phil Lubinski, co-founder, WealthConductor said he believes retirement plans will embrace annuities because the No. 1 fear of retirees is running out of money.

“We need to address what retirees want,” he said. “Cerulli studies have shown that retirees are not looking for a product but a strategy.” If sponsors and advisers present the benefits of guaranteed lifetime income to participants, he believes they will embrace the approach.

Investment Product and Service Launches

Hartford Funds launches new ETF and T. Rowe Price creates Impact Equity Fund.

Art by Jackson Epstein

Art by Jackson Epstein

Hartford Funds launches new ETF

Hartford Funds has launched a new exchange-traded fund (ETF), the Hartford Longevity Economy ETF (NYSE Arca: HLGE).

The fund seeks to provide investment results that, before fees and expenses, correspond to the total return performance of the Hartford Longevity Economy Index (LHLGEX).

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LHLGEX is designed to generate attractive risk-adjusted returns by investing in companies that comprise industries that reflect certain themes that are expected to benefit from the growth of the aging population and the substantial buying power it represents. 

HLGE is designed to invest in companies included within industries that provide goods and services that reflect longevity economy themes, including aging in place and home modification, working longer, performance health and comfort, maintaining social connections, financial freedom, staying mobile, human enhancement and leisure, and entertainment. 

HLGE is designed to address risks and opportunities within the U.S. longevity economy universe by selecting equity securities of companies exhibiting a favorable combination of priority multifactor characteristics, including valuation, momentum, and quality. LHLGEX seeks to outperform a capitalization-weighted universe of U.S. capitalization equity securities over a complete market cycle.

“Education about the importance of longevity planning has long been a hallmark of the insight Hartford Funds shares with financial professionals, and this product is an extension of that strategy,” says Vernon Meyer, chief investment officer (CIO) at Hartford Funds. “By leveraging our world-class multifactor indexing approach and risk management, the Hartford Longevity Economy ETF seeks to deliver a unique and diversifying shareholder experience by tapping into the underappreciated and persistent value of evolving consumer patterns among the widening senior demographic.

HLGE is listed on the New York Stock Exchange Arca Inc. and its estimated current expense ratio is 0.44%

T. Rowe Price Creates Impact Equity Fund

T. Rowe Price has launched its first product giving investors the opportunity to simultaneously pursue their financial goals and to have a positive impact on the global environment and social equity issues. 

The T. Rowe Price Global Impact Equity Fund will employ an active management approach to seek companies that the company says are on the right side of these changes. It will initially be offered to U.S. investors, but the firm intends eventually to introduce the strategy to clients around the world.

The fund will seek out companies that can potentially provide excess returns over its benchmark, the MSCI All-Country World index. It will focus on three pillars: climate and resource impact, social equity and quality of life, and sustainable innovation and productivity. It will exclude certain industries and companies that the manager believes do not conform to the fund’s impact mandate, such as fossil fuels, tobacco, gaming and for-profit prison companies.

The fund will be aligned with the United Nations Sustainable Development Goals (UNSDGs), a globally recognized framework designed to end poverty, ensure prosperity and protect the planet.

The fund will be managed by Hari Balkrishna. Balkrishna has 15 years of investment industry experience, including spending the past decade at T. Rowe Price. From 2015 until the end of last year, he was associate portfolio manager of the firm’s global growth equity strategy. Having lived and worked on five continents, Balkrishna has a keen understanding of the many different social systems around the world and he is personally passionate about addressing climate change.

The fund will employ an all-capitalization, high-conviction approach, typically owning between 55 and 85 securities, focused on those that Balkrishna believes will create positive environmental and social impact, along with attractive returns, over a long-term time horizon.

As with other T. Rowe Price strategies, the fund will draw upon the firm’s global equity research platform, comprising 203 equity research analysts, 10 sector portfolio managers and 73 regional and diversified portfolio managers. In addition, the fund will tap the expertise of the firm’s environmental, social and governance (ESG) experts and responsible investing research analysts, as well as its proprietary Responsible Investing Indicator Model (RIIM), a database detailing how more than 15,000 securities measure up against established environmental and social parameters.

The net expense ratio for the Investor Class shares (Ticker: TGPEX) is 0.94% and the minimum initial investment is $2,500. The net expense ratio for the I Class shares (Ticker: TGBLX) is 0.79% and the minimum initial investment is $1 million.

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