Getting the Word Out
Why employers still shy away from retirement-income products, and what advisers can do about it
Reported by Judy Ward
However, Pickett does not expect to sell his sponsor clients quickly on these products’ in-plan use. “We have been talking about this [primarily in-plan] investing philosophy for going on three years,” he says, adding that it takes a sustained effort to educate employers on all the options. “You have got to ‘drip’ on people awhile. It is not a matter of one session. It is a very deep subject and, once you start to look at these products, it becomes very confusing. It is going to take education and time.”
Eighty-three percent of sponsors express concern that employees will make poor decisions with their accounts at retirement, according to a March 2009 Principal Financial Group survey of its clients. Yet, just 40% offer education targeted to employees near retirement, Principal says. “I think that creates a tremendous opportunity for advisers to fill that gap,” says Chris Mayer, The Principal’s Vice President, Retirement and Investor Services.
Yet, in-plan use of retirement income products remains relatively scarce. “The whole industry has been talking about accumulation, not about income in retirement,” says Jamie Kalamarides, Senior Vice President of Retirement Solutions at Prudential Retirement. “Advisers need to shift their thinking to how to help their sponsors create the right outcomes—and the critical outcome is, does an individual have guaranteed income for life that he will not outlive?”
Advisers are part of the issue right now, says Martha Tejera, a provider search consultant at Seattle-based adviser Tejera & Associates, LLC. “Advisers need to get up to speed on what is out there,” she says. “The majority of advisers either do not know, or they think they know and they do not know.” Some advisers still avoid these products because of problems with annuities in the 1980s and early 1990s, unaware of improvements made since then, she says. However, they should learn more, she argues, because an adviser’s job goes beyond just keeping plan sponsor clients out of trouble—it also means helping make plans as effective as possible in ensuring that participants have adequate income in retirement.
Kalamarides argues that getting more knowledgeable about retirement-income products ultimately helps advisers, too. “A plan adviser often gets paid based on total plan assets. If the distribution default is in cash, the assets leave the plan, and the adviser is not always able to capture those assets as rollovers.” In-plan use of these products, he says, “encourages assets to stay in the plan.”Sources cite these four main reasons why employers still hesitate to get involved with retirement-income products:
Concerns about fiduciary responsibility. Many employers do not see the distribution phase as their responsibility. When PLANSPONSOR asked them last year if they believe sponsors have a responsibility to manage retirement-income distributions for retirees, 75.9% said no. Says Stephen Utkus, a Principal at the Vanguard Center for Retirement Research, “These [in-plan] products are just too new. No employer is going to put in an untried concept. It is hard to imagine there is going to be a surge of interest in the next five years.”
As fiduciaries, employers fear “the long-term nature of these products, and the difficulty of unwinding them. It is not like going out and hiring a growth-stock manager,” Pickett says.
The Pension Protection Act eliminated the “safest available annuity” standard for DC in-plan retirement-income products. The rule, which now applies only to defined benefit plans, stems from the Employee Benefits Security Administration’s 1995 issuance of Interpretive Bulletin 95-1, which provided fiduciary guidance on picking an annuity provider and set a high standard by making clear that fiduciaries generally must take steps to find the safest available annuity.
Yet, while the requirements have been relaxed for defined contribution plan sponsors, Tejera says, sponsors still make a decadeslong commitment when they pick an in-plan annuity. In light of recent problems among some insurers and arguably unreliable insurance-company ratings, she says that employers have a valid concern that insurers may “come and go.”
The industry does not have any step-by-step standard for sponsors and advisers to evaluate these products as an in-plan option, Tejera says, although the Institutional Retirement Income Council (IRIC) continues working on tools to help evaluate retirement-income products. Employers need to approach picking an in-plan option the same way as other investment decisions, says Pat Harris, Director of Lifetime Income Products at The Hartford—with a documented due-diligence process that focuses on picking an option that works for their specific employee base, and a documented monitoring process. On its Web site, IRIC has a “Product Comparison Criteria Overview” that suggests specific issues to consider in areas such as the fee structure, investments, income base, claims-paying ability, spousal/joint annuity options, portability, and participant education and communications.
Lack of plan-level portability. “Most recordkeepers will not even put a guaranteed minimum withdrawal benefit or other in-plan annuity product on their platform, because it is something that has to be communicated to participants, and how do they do that? Do they train their people in how retirement-income products work, or do they just provide a hot link to the provider?” Pickett says. “It is different metrics than just putting money into investments. It is almost a double recordkeeping system, but it is not anything they cannot do.” Indeed, Harris says she has started to see improvement in platform availability in the past year.
Contract terms that limit portability at the plan level also inhibit many employers from picking an in-plan option. “Suppose, five years later, the employer decides it was not a good idea, and wants to switch from Insurer A to Insurer B. You cannot, unless you are willing to give up the guarantee,” Utkus says. “The current contract requirements are too illiquid.”
Improvement may come in time, if employers thinking about adding an in-plan option press recordkeepers on the issue. “If enough plan sponsors talk to their recordkeeper, they will listen,” Pickett says. In the meantime, he recommends getting in writing from recordkeepers exactly what will happen if the sponsor subsequently makes a change, so employers clearly understand the drawbacks upfront.
Or employers can facilitate access at retirement to individual rollover annuities at institutional prices outside the plan, Mayer says (see “As Good As Annuity,” PLANADVISER July-August 2008). He says timing works better for many participants, anyway. “You are asking participants to make some choices they may not be well-positioned to make before retirement,” he says of committing to an in-plan annuity. “The big benefit of offering it at the time of distribution is that they do not have some of the portability concerns.”Hard for employers to understand. “There is confusion and lack of understanding, and almost a paralysis, on the part of plan sponsors,” Mayer says. For those willing to consider an in-plan option, they need to understand the four types of potential in-plan annuities, says adviser Dorann Cafaro, General Partner at Cafaro Greenleaf in Little Silver, New Jersey: an immediate annuity, a guaranteed minimum withdrawal benefit, a guaranteed minimum income benefit, and a fixed annuity (see “The Inside Story,” PLANADVISER September-October 2008). That means grappling with the wide variety of product names and terminology used, Pickett says. “There is not even a uniform language for some of these products,” he says. “[Providers] will use different terms for the same product. There needs to be more uniformity.”
However, educating plan sponsors about retirement-income products should not start with talk of specific offerings. Says Utkus, “You want to make sure that employers do not just get one side of the story. If you come in and say, ‘I have got the right answer,’ most employers will get a little worried.”
Advisers need to start by first listening to sponsors, Kalamarides says. “They should ask employers: ‘What percentage of your employees are 50 or older? What proportion of your plan assets are in that group? Are these folks ready for retirement?’” he suggests. “Ask them: ‘Do you feel an obligation not only to help people accumulate savings, but also to have the tools for retirement security?’ Some will say no, but most will say yes, and that opens up the conversation.” Then, an adviser can start to explain the main types of retirement-income products and how they work, their costs, and the pros and cons of each, he adds.
Expect a lengthy process with sponsors, Pickett says. “The education should be part of every quarterly meeting.” He suggests starting by “putting together a presentation on the need for retirement income: that people are living longer, and there are questions about Social Security and defined benefit plans. Ask them: ‘Is this a wealth-accumulation plan or a retirement plan?’ If it is a retirement plan, it needs to provide money for food and shelter until the day they die.”
Lots of participant education required. Principal finds in its work with employers offering in-plan options that small things make a big difference, Mayer says. That means including annuity information in the benefits kit that new employees get, as well as a phone number to call if they need any explanation. In addition, it means not using benefit-election forms that make retirement-income products an all-or-nothing proposition: either check this box to take an annuity, or that box to take a lump sum. For some participants at retirement, he says, a mix of an annuity purchase and some cash payment may be the best solution. “Some might want to keep part of the money in a lifecycle fund and put part of it into an annuity,” he says.
Several sources suggest a reality-check step. “I would like to see the quarterly benefit statement take the participant’s balance and project what income level it will generate in retirement,” Tejera says. “If we can get participants thinking about what level of income their savings are going to support, it will move us along the path.”
Just as with sponsors, do not approach participants with a product mindset. “Part of the problem is that too often we start with the product as the first decision that needs to be made,” Mayer says. “When we have done focus groups with retirees, they are not looking for products. They want personalized guidance and education, and then they want to bring in the range of products. We need to put the horse before the cart.”
The best hope lies in customized education. “We tend to target the education beginning at age 50,” Mayer says. “If you start it at retirement, it is probably too late. When we visit with some of our largest clients, they want targeted education focused on the unique needs of individuals approaching retirement.” Adds Kalamarides, “If you can find folks who are the informal influencers within an organization, having an adviser focus on these people first, and getting them to understand and adopt these products, helps.”
Even if they do one-on-one sessions with participants, however, advisers need to have realistic expectations about the outcome. While take-up rates can run as high as 30%, advisers should have more-modest expectations for most participant groups. “Employers need to have multiple solutions available,” Mayer says. “I do not believe that every participant should use an annuity, and even those who use them probably should not use them for all of their account balance.”