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.”
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.
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