The Role of Guaranteed Minimum Benefit Riders in In-Plan Annuities

With some riders, participants can enjoy the upside of the market with downside protection.

When it comes to annuity riders such as a guaranteed minimum withdrawal benefit (GMWB), or other types of riders being used for in-plan choices, there are two main approaches that are currently most popular in retirement plans, says Eric Henderson, president of Nationwide Annuity at Nationwide Financial.

“The first is a variable annuity with a guaranteed lifetime withdrawal benefit [GLWB] rider,” Henderson says. The GLWB allows the annuity owner to take regular or occasional withdrawals from the annuity during the accumulation period before it is annuitized. Henderson says this option is also very popular in the retail world. Should the market perform well, the annuitant can get that upside, and even if the account value went to zero, the annuitant would continue to get the guarantee, he notes. “It guarantees you to get some amount no matter how the market performs or how long you live,” Henderson says.

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Plans are also offering deferred income annuities, which kick in at a later age, typically at a person’s life expectancy, Henderson says. “These are almost always a fixed product,” he says. “It does not give you participation in the market but it is fixed, no matter what,” and it protects the owner from longevity risk, he adds.

A few target-date funds (TDFs) have annuities with GLWB riders, Henderson says. These TDFs do not begin purchasing annuities until the owner reaches age 45 or 50. “By age 60, the TDF might have all of its assets in a variable annuity with a GLWB,” he says. “For the participant, this is all happening behind the scenes. They just see on their statement how much money they will receive each month for as long as they live.”

AllianceBernstein launched a TDF series in 2010, Secure Retirement Strategies, that has this type of annuity in it, and Nationwide is one of the three insurers in the glide path, Henderson notes. Barclays Global Investors, now BlackRock, pioneered the structure with its LifePath Retirement Income funds in 2007, and Prudential Financial also has TDFs with annuities.

Henderson says he expects that the Setting Every Community Up for Retirement Enhancement (SECURE) Act will prompt more TDF issuers to embrace annuities in their glide paths.

Bob Melia, executive director of the Institutional Retirement Income Council, says GMWB and GLWB riders are like guaranteed monthly income benefit (GMIB) riders. They just calculate the payout differently, Melia says. He says TDFs that have annuities with these types of riders might be beneficial to participants, but he is not in favor of sponsors that offer annuities outright in their plans attaching riders to them. When a person selects an annuity with a rider, it is to address their personal situation, Melia says. Sponsors cannot make these decisions wholesale for all the participants in their plans, he says.

“Those decisions belong in the financial planning world, not the defined contribution [DC] world,” he says. “The value propositions are slightly different in all of these types of annuities with riders. It is up to the individual to think through what they want. Financial planners can talk to their clients to get a risk profile and find out their financial goals.”

Gen X Facing the Stark Reality of Retirement

More than any other generation, its members are receptive to in-plan guarantees.

A new study from Allianz Life found that retirement plan participants—particularly Generation Xers—are increasingly interested in guaranteed retirement income options.

Born between 1965 and 1980, members of Generation X are between the ages of 40 and 55. Its older members are beginning to realize that retirement is fast approaching and that they might not be as prepared as they should be, Matt Gray, assistant vice president of worksite solutions at Allianz Life Insurance Co. of North America tells PLANADVISER.

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“They have also lived through at least two significant market crashes,” he says, referring to the dot-com crash of 2001 and the Great Recession of 2008. “The current volatility they have been seeing as a result of the coronavirus pandemic is also making them worried.”

Among all age groups, 71% of participants in retirement plans would like an option that offers guaranteed income for life. This jumps to 75% for Gen Xers, but declines to 67% for Millennials, who—having been born between 1981 and 1996 and ranging in age between 24 and 39—are further away from retirement.

Among all workers, 55% are worried that the money they have saved in their employer-sponsored retirement plan will run out, and, again, this figure rises for Gen Xers, to 69%. Among Millennials, 56% are worried the savings in their 401(k) or other workplace retirement plan will run out in their golden years, and this is true for only 45% of Baby Boomers.

Fifty-eight percent of workers would be receptive to having an annuity offered in their plan, and 68% would like a product to protect them against market downturns, the study found.

Gray says that given their proximity to retirement age, Gen Xers’ concerns do not surprise him, but he is rather stunned “to see such an intense focus on protection.” This wake-up call is, in a sense, a good thing for Generation X, as its members still have 15 to 30 years to continue to save, should they retire at age 70, Gray says. “Most of them are in their peak earning years, and there is still enough time for them to adequately prepare for retirement if they act.”

He adds that the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which has implemented a safe harbor and allowed portability for annuities inside retirement plans, is a true gift from the government for Millennials, who are likely to be the first generation to be offered in-plan guaranteed options. “They are lucky to be inheriting a much better tool set,” Gray says. “You are going to see a lot of innovation coming. These are two good things in their favor that can help them overcome this worry.”

He adds that he expects future surveys Allianz conducts in the next 10 to 15 years to show Millennials sharing the same concerns as Gen Xers.

Thérèse Wolfe, a tax principal with UHY Advisors, says that besides seeing retirement on the horizon, many Gen Xers are taking care of both aging parents and children, making them the newest “sandwich generation.” Gen Xers are also the first generation to have valid concerns about Social Security funds not being there for them in retirement, Wolfe says.

Matthew Schulte, head of financial planning at eMoney Advisor, agrees, saying: “This group is sandwiched between their children, who often still require financial support, and their ageing parents, who may also need financial or medical assistance, especially amid the current pandemic.”

Wolfe reports that many of her older Gen X and Baby Boomer clients are “reinventing themselves” by taking on second careers to remain longer in the workforce to make up for savings shortfalls.

Aadil Zaman, a partner at Wall Street Alliance Group, which serves high-net-worth clients, says he encourages his Generation X clients to save as much as they possibly can in their retirement plan. “In our experience, more often than not, they are not saving enough, especially those in their 50s,” Zaman says. “Even the high-net-worth people earning a lot don’t have much to show for it because they haven’t been conscientious.”

Zaman says he is not a proponent of insurance products because of their costs and the current low-interest rate environment. Rather, he encourages his clients to have a well-diversified portfolio of equities and bonds, 50/50, held in mutual funds and exchange-traded funds (ETFs). “The likelihood of the market being higher 10 years from now is almost 100%,” Zaman says.

He also is a proponent of gold as an investment, as well as whole life insurance. He advocates that those closer to retirement increase their bond holdings so that they are “less susceptible to market declines.”

Zaman says that, overall, Generation X needs much more education about the importance of having a diversified portfolio and saving enough to put themselves in a solid position at retirement.

Gray concludes that he hopes “great plan advisers and consultants will help plan sponsors and participants understand in-plan guarantee solutions and how they can improve outcomes. It is a great time for advisers to learn more about these solutions. They will enhance the value they bring to sponsors and participants alike.” As well, Gray continues, “there is an onus on insurance companies providing these guarantees to make them simple for advisers, sponsors and participants to understand and use.”

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