In an issue brief, “Understanding How Guarantee Fees are Structured and Paid in Institutional Retirement Income Products,” IRIC notes that fees for income guarantees vary by product type and provider, and by the features of the product. Some fees are explicit and easy to detect, and are disclosed in the product information. Other types of income products may have more implicit fees.
The issue brief provides examples of the various implicit and explicit fees associated with both income annuity products and guaranteed minimum withdrawal benefits (GMWBs). Fees for income annuity products are built into the pricing of the product and are reflected in the monthly income benefit that is provided. Therefore, the cost of both the income guarantee and investment management provided are considered implicit. On the other hand, fees associated with GMWBs are generally explicit and must be made available to plan participants. The issue brief also includes a table that identifies fee structures available on four GMWB products currently available in the market.
“As plan sponsors become more interested in offering guaranteed lifetime income products, understanding the fee structures will be critical. While income annuities can provide higher amounts of guaranteed lifetime income, the fees associated with them are not explicitly stated,” said Clark Frese, Principal at Asset Strategy Retirement Plan Consultants, and an IRIC member who authored the issue brief.
“Conversely, guaranteed minimum withdrawal benefits generally provide lower amounts of guaranteed income but provide for greater flexibility and have explicit fees for both investment management and income guarantees. Plan consultants and advisers can assist their clients to better understand the trade-offs with each approach and each income product,” Frese concluded.
To obtain a copy of the issue brief, visit http://iricouncil.org/iricArticles.
IRIC recently issued another report encouraging retirement plan sponsors to offer retirement income investment choices (see “IRIC Calls for Retirement Income Menu in 401(k)s“).