PANC 2009: Making Participants Aware of Retirement Income Products

Individual investors buy guaranteed income products for retirement, why not retirement plan participants?

The question was asked by Dorann Cafaro, general partner, Cafaro Greenleaf, an NRP member firm, moderator of a panel discussion about retirement income at the PLANADVISER National Conference in Orlando, Florida.

Zhivago Velasco, director of product development, MassMutual Retirement Services, said he believes retirement income is a very important part now of selling a retirement plan. However, a problem noted by James Lyday, senior vice president at Prudential Retirement, is how to take something that costs 300 basis points in the retail market and price it for retirement plans.

Product Development

Another problem Lyday sees is in the product types available to participants; participants want control over whether a benefit is paid as an annuity or not, while also wanting a guarantee, he said. Whatever the solution, it has to be simple and portable, contended Bill Hicks, Divisional Vice President at John Hancock.

Lyday suggested a guaranteed minimum withdrawal benefit (GMWB) as an option that provides income security without taking away participant options, something Prudential offering through its IncomeFlex product. A GMWB provides the benefits of an annuity, but doesn’t have to be paid as an annuity, he said.

John Hancock uses a simple income rider, Guaranteed Income for Life, which is built around three lifestyle funds and other American Funds investments, Hicks said.

Outside The Plan

Alternatives to an in-plan option include variable annuities, income annuities, and living benefit riders which give participants a choice at the point of retirement, said Velasco, but the benefit of an in-plan option is that it makes participants aware of the need to guarantee income before their retirement date.

According to Lyday, an in-plan option is best because given options at retirement, participants may just take their money in a lump sum but not know the best place to put it. He said he believes sponsors should default participants into in-plan guaranteed income options.

Hicks suggested that participants need education early on about why they need guaranteed income. Velasco agreed that portability and understanding are issues in getting participants to select guaranteed income options. Currently, it is not easy to "cash out" retirement income products. Lyday noted that recordkeepers are getting up to speed on recordkeeping retirement income products which will help increase the participant take-up rate.