There’s optimism among providers of in-plan lifetime income products that 2022 could be the year their efforts gain traction in the defined contribution arena, thanks to favorable regulation and more choices that could overcome sponsors’ historical worries about cost, complexity and liability.
Defined contribution consultants, however, inject notes of caution about the rate and speed of adoption for in-plan annuities and guaranteed minimum withdrawal benefits. They point to workplace demographics, participants’ savings behavior, industry inertia and COVID-19 as factors that could slow or discourage the use of such options.
Surveys offer both encouragement and caution.
Last month, the Plan Sponsor Council of America noted that 10.1% of plans offered an in-plan annuity in 2020 based on a survey of 518 profit-sharing and 401(k) plans. However, the adoption rate appeared to be static. Less than 1% of respondents (0.6%) added an in-plan annuity in 2020. For 2021, the survey reported that 0.9% of respondents would add an in-plan annuity.
A survey by Willis Towers Watson PLC reported that 16% of respondents in 2020 — the latest data available — offered in-plan annuities and 15% were planning to offer them, compared with the firm’s 2017 survey that said 7% offered or were planning to offer in-plan annuities.
“Clearly there is an increased focus on retirement spending, not just retirement savings,” said a December 2020 report based on the survey covering 464 DC plans, some of which were clients.
The Willis Towers Watson and PSCA surveys took place before the launching of many in-plan products last year, some of which won’t go live with sponsors until this year. Among the newcomers are products from Fidelity Investments; BlackRock Inc.; a consortium of companies called Income America LLC; a collaboration between J.P. Morgan Asset Management and the AIG Life & Retirement division of American International Group Inc.; and a collaboration among Allianz Life Insurance Co. of North America, LDI-MAP and IPX Retirement.
Both surveys also were conducted after the December 2019 enactment of the Setting Every Community Up for Retirement Enhancement Act, and industry members said it has taken time for sponsors to analyze the details.
The SECURE Act provides a fiduciary safe harbor for DC plans that offer in-plan annuities if an annuity provider were to fail. The law protects sponsors if they obtain “written representations” from an insurer or other provider affirming their financial health, and they aren’t required to conduct their own evaluation.
“The safe harbor was a very important piece of legislation,” said Ralph Ferraro, senior vice president for workplace solutions, product and underwriting for Lincoln National Corp., Radnor, Pa. “It will be a catalyst over time the same as what the Pension Protection Act did for target-date funds.”
Since the PPA was enacted in 2006 providing guidelines for several types of qualified default investment alternatives, target-date funds’ growth has soared and these options are now the dominant QDIA.
Among its lifetime income efforts, Lincoln is part of Income America LLC, which launched in March 2021 Income America 5ForLife, an in-plan guaranteed minimum withdrawal benefit embedded in a collective investment trust target-date series. Lincoln unveiled in July 2020 a guaranteed lifetime income product called Lincoln PathBuilder, in which sponsors can add this option separately like any other investment to a plan’s lineup or within a target-date series.
Lincoln also is one of the insurers that supports a guaranteed minimum withdrawal benefit from AllianceBernstein LP, called Lifetime Income Strategy, which is offered within a custom target-date series.
“We are seeing increased interest,” said Jennifer DeLong, the New York-based senior vice president, managing director and head of defined contribution at AllianceBernstein. “The SECURE Act was a great step forward.”
AllianceBernstein knows how difficult the market can be. Since offering its Lifetime Income Strategy in 2012, it has five clients with total retirement assets of $6.5 billion. Clients include its own 401(k) plan, Raytheon Technologies Corp. and the Illinois State Universities Retirement System.
“We have seen an increase in research activity” by sponsors, said Ms. DeLong, noting that some large plans have issued RFPs for in-plan retirement income options. “It’s evidence that sponsors are looking at solutions and are asking for time to evaluate different products.”
Industry caution about in-plan products was highlighted by a poll from the National Association of Plan Advisors, which said 39% of respondents described as “minimal” their clients’ interest in in-plan retirement income products.” The poll was published Nov. 15 on the NAPA website.
Another 36% of the 957 respondents said client interest was “occasional” and 14% said interest was “non-existent.” Twelve percent said client interest was “frequent” or “high.”
Asked what stopped or slowed their clients from exploring or adopting in-plan retirement income options, the biggest response was, “just not a current priority” (256 responses), followed by product concerns such as cost and complexity (236) and knowledge of available options (162). Multiple answers were allowed among six possible responses.
“The biggest impediment to adoption may simply be that … participants don’t seem to be asking for the option,” said the NAPA website. “And when they do have access, most don’t take advantage.”
DC consultants remain reserved about the growth prospects of in-plan options such as annuities or guaranteed minimum withdrawal benefits within DC plans.
“At this stage, we haven’t seen a big move,” said Greg Ungerman, senior vice president and defined contribution practice leader for Callan LLC, San Francisco.
The SECURE Act certainly helps and more products mean more choices, but there are still issues affecting individual sponsors that militate against a mass embrace of in-plan options, he said.
“Do we have a population that would use it? And do they save enough for it to make sense?” said Mr. Ungerman, citing as an example high-turnover industries in which participants don’t save very much. “You need a sizable balance.”
Product complexity and fees remain a concern, he added.
DC plan executives “have pretty long memories about insurance products that imploded in the 1990s,” said Michael J. Francis, president of Francis Investment Counsel LLC, Brookfield, Wis., a provider of investment consulting and financial wellness services. “Never again will they put all their eggs in one insurance company basket — even a top-rated one.”
Even though some current and recent in-plan products have multiple insurance-company backing, Mr. Francis said low interest rates make in-plan annuities less desirable.
“Locking in for 30 years now doesn’t attract them,” he said. “Advisers struggle with balancing security and returns” when evaluating retirement income products.
If in-plan retirement income is to become a DC staple, he added, it must start with large plans using target-date series as a foundation with products backed by multiple insurers.
And don’t forget the COVID-19 impact on sponsors’ decision-making. “COVID has slowed everything down in terms of benefits,” Mr. Francis said. “With COVID, they have bigger fish to fry.”
DC consultant Robyn Credico said her clients haven’t expressed much interest in in-plan retirement income products.
Workforce demographics weigh heavily on sponsors’ decision-making about retirement income products, she said. “If people will be there for three or four years, it doesn’t make much sense,” said Ms. Credico, the Las Vegas-based defined contribution consulting leader for Willis Towers Watson. Sponsors considering such options must be sure their record keepers are able or willing to support such products on their platforms, she added.
Another reason why sponsors are slow to adopt retirement income options is the lack of a common language among the many products or strategies that they must evaluate. The definition of retirement income “is all over the place,” said Mr. Ungerman.
“The biggest impediment for success at the plan level is the need for educating sponsors and advisers,” said Michelle Richter, principal and founder of Fiduciary Insurance Services LLC, New York, a consulting firm and registered investment adviser. “Fiduciaries need a standardized process.”
To address that problem, Ms. Richter has been working with several insurance, benefits and financial technology firms to develop a standardized methodology for evaluating lifetime income. The group includes Cannex Financial Exchanges Ltd.; Fi360, a unit of Broadridge Financial Solutions Inc.; AllianceBernstein; Nationwide Mutual Insurance Co.; Allianz Life Insurance Co. of North America; and Income America LLC.
Fiduciary advisers “do not have access to an agreed-upon, standardized methodology for how to translate the value of a stream of lifetime income to an asset-based number, and vice versa,” Ms. Richter said.
“If you can’t calculate, in a standardized fashion, the value of benefits, then it cannot be knowable whether an annuity is or is not ‘expensive,'” she said. “This results in the perception that all annuities are expensive because the cost of having lifetime income protection is inherently higher than is the cost of not having this protection.”
Ms. Richter said she hoped to provide more information about the group’s efforts in March. Once a framework is established, she predicted it would take two years to develop the standardized process.