A Method for Comparing Retirement Plan Annuities

John Faustino, the head of Fi360, a Broadridge company, discusses new guidance to help advisers pitch in-plan retirement income annuities in a year when the products may be getting more attention.

According to a recent Invesco retirement income study, most people with defined contribution savings plans (83%) expect it to be their largest source of income in retirement. With some data showing retirement portfolios were down by as much as 23% last year, along with inflation causing pressure on everyday expenses, relying on a 401(k) for income may feel tenuous for many heading into 2023.

John Faustino, the head of Broadridge’s Fi360, a fiduciary training and software firm, has been working toward the use of annuities as guaranteed income solutions in DC plans through Broadridge’s retirement income consortium. The group includes leading annuity providers Allianz, Nationwide and TIAA, as well as data and analytics firms that work with advisers, including Fi360, Cannex and Fiduciary Insights.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 helped relieve the fiduciary responsibilities for plan sponsors to provide in-plan annuity options with the goal of providing more retirement income options. Implementation, however, has been slow, even as interest rates have gone up in 2022 and driven record sales of annuities in the retail market.

On Tuesday, new research released by HR technology firm Alight Solutions reiterated the trend toward slow adoption, with nearly half (47%) of employers saying they do not provide in-plan annuities due to fiduciary concerns. Tellingly, Alight noted that the 47% figure is the same percentage it saw in the same survey five years ago.

PLANADVISER checked in with Faustino to see where he sees in-plan annuities going in 2023, given the current environment. He discussed a new program just launched by the consortium for advisers to consider, research and implement retirement income options for their clients.

PLANADVISER: Tell us about Fi360‘s new guidance for implementing retirement income solutions.

Faustino: On December 30, [2022], we published criteria for comparing retirement income solutions contained within what we call our prudent practices, which is a collection of legislation, regulation and case law. In late 2023, we’re also launching a software tool based on this methodology.

This new set of prudent practices is focused specifically on retirement income solutions and form a legal and regulatory substantiation for retirement plans using them.

PLANADVISER: How do you expect these practices to be used?

Faustino: It is designed to help advisers document their reasoning for selecting a particular retirement income solution for a plan and to help them monitor their selections and the overall process.

PLANADVISER: Why is this guidance needed now?

Faustino: Many Americans retiring now have concerns that their money will [not] last. People are living longer, and fewer have defined benefit plans. This creates anxiety about maintaining one’s current lifestyle or even a minimum standard of living throughout a lifetime.

While need exists, plan advisers have concerns about using guaranteed income solutions within plans, even after the SECURE Act of 2019 enhanced a safe harbor for the selection of an insurer associated with a retirement income solution.

You don’t have that same transparency with lifetime income options or tools available to research and compare them, like you do with traditional 401(k) options. Mutual fund data is readily available, but not a list of all lifetime income solutions. And there is no step-by-step guide to help you select and monitor a retirement income solution like there is for the selection of a mutual fund.

PLANADVISER: Why is there a lack of tools for lifetime income options?

Faustino: I think it’s not unusual, based on where we’re at with the lifecycle stage of these options. We’ve seen it with other evolutions like collective investment trusts, for example. They weren’t widely adopted in plans until demand drove database and tool availability, and that took a while to get established and cleaned up.

The tools and data for lifetime income are taking a similar trajectory as I’ve seen in the 25 or 30 years that I’ve been working in the industry. I’d say this is the natural order of things. It seems to take a while for the infrastructure of the industry to catch up to the market need.

PLANADVISER: But you’re creating a tool, not the data that will be fed into the tool, correct?

Faustino: Correct. We’ve designed the tool in a way that if data is not readily available, advisers can manually enter data into the tool. The tool will then help with the comparison.

Cannex is one firm working to collect and provide the data, and it’s part of the Retirement Income Consortium, which is working to create greater access by workers to retirement income solutions. One of the challenges it and other data providers face is how to normalize the characteristics of solutions, for instance, fees and expenses, portability and death benefits.

The goal will be to have data that is packaged in a way that it can be consumed by someone that wants to deal with it in an agnostic, comparative fashion analogous to what Lipper and Morningstar have done with fund data.

Another firm, Mesirow, does calculations on top of primary data to understand the implicit costs and benefits of solutions.

We may end up working with a variety of partners to make our tool usable to those who want to analyze retirement income solutions.

PLANADVISER: What incentive do solution providers have to make their solutions more comparable?

Faustino: Mutual fund providers have to provide data to the market due to regulation. But it’s not necessarily the case with providers of all retirement income solutions. It’s more of a voluntary disclosure of the data.

I believe that it’s going be in their best interest to do so, because the more transparency they provide on their offerings, the more eyeballs they’ll get on their offerings, which means higher chances that advisers and plan sponsors will consider the offerings.

Here I’d like to add that it will be plan advisers who play a critical role in talking to solution providers to ensure that their solutions are available on the platforms that they want to trade on.

PLANADVISER: Your tool is not the only one that enables comparison of lifetime income solutions. What is different about yours?

Faustino: One difference is that our tool incorporates and scores all of the data points against each other.

The solutions are nuanced, especially at this time in their evolution. Comparing them comes down to the fit of a given solution to a given plan. It’s likely that the same adviser may recommend different solutions to different plans, based on the unique requirements of the underlying participants.

PLANADVISER: What’s next?

Faustino: We hope that the publishing of our methodology, and soon a white paper, will encourage advisers and plan sponsors to give more consideration to retirement income solutions. We also hope that data and tool providers will respond to the need and make evaluation and monitoring of these solutions easier than it is today. There are lots of opportunities for many fintechs and solution providers to address the retirement income needs of plan participants.

Ultimately, we’re focused on helping advisers manage all investment accounts with a fiduciary standard of care. And this is where the market is underserved right now. I believe there’s a great opportunity for the industry to step up and help address this need collectively.

We hope that our tool and other tools become part of advisers’ standard workflows.

We’re really trying to address some of the very practical operational challenges that are associated with advisers adding a new solution type into a retirement plan.

If they don’t have the data to compare these things, if they don’t have the tools to compare them, if they can’t include them in their quarterly monitoring reports, it’s going be more challenging for them to work with their plan sponsor.

It’s only when we make the consideration of these new solutions as seamless as the consideration of legacy solutions [that] advisers will embrace them.