Lifetime income options seen in DC plans' futures
February 4, 2013 by Andy Stonehouse
Although they don’t go quite as far as initially mentioning the ever-controversial word “annuity,” retirement trade organizations say they believe the future of the defined contribution plan will have to include more options for guaranteed lifetime income.
A new report from the Insured Retirement Institute echoes the sentiment that using guaranteed lifetime income options as part of the in-plan offerings will indeed be a major push in the future – one even endorsed by the Obama administration in 2012.
Annuity sales grew tremendously in recent years, outpacing many other traditional insurance products, and their role in the retirement planning business is slowly expanding, though product innovation is definitely needed to help overcome the stigma surrounding the product and encourage more to be included as options in retirement plans.
Variable annuities, in particular, have also raised the ire of both FINRA and the SEC as they remain expensive and complex, with a litany of riders which might harm investors who aren’t aware of all the stipulations when time comes to draw down their investments.
The primary issue, the IRI notes, is getting around the sticky problem of fiduciary concerns when it comes to advocating and including guaranteed lifetime income options as part of a DC plan.
While the DOL changed its rules last year to give plan sponsors the opportunity to figure out how to address their fiduciary responsibilities, that’s easier said than done – especially as employers are asked to conduct a detailed review of insurers’ finances and then evaluate whether or not those long-term annuity obligations can be met.
The IRI’s study concedes that plan sponsors may not be particularly well-equipped to actually do complex, long-term financial projections on the future viability of insurers – a challenging prospect considering many insurers’ recent problems and a trend that’s seen several major firms get out of the annuity business in response to low returns from the products.
“With an increasing amount of consumers agreeing that annuities are a critical component of a retirement strategy, there is an appetite for these types of options,” said the IRI’s Cathy Weatherford, in a statement.
“And so there is a tremendous opportunity here for the insured retirement industry and plan sponsors to work together to make income options more accessible and tangible.”
As part of its study research, the IRI says it found that 89 percent of plan participants expressed interest in income-generating options provided as part of their DC plan; older boomers surveyed also listed guaranteed income as an important aspect when it comes to making selections for retirement products.
In-plan guaranteed income options could also provide participants with more protection against market volatility, especially as they get closer to retirement age, and serve as yet another labor force management tool designed to help employees actually retire when planned, rather than working past their retirement age.
There’s been considerable resistance to annuity products, however, with low take-up rates when the products are offered, plus concerns about the flexibility of product offerings and the portability of products. Annuities are also seen as making participants give up control over their own retirement assets, which has also clouded their growth.
