Plan sponsors that are busy building shelf space for
guaranteed lifetime income investments should note that participant interest in
putting retirement savings into such products fell somewhat in 2021, according
to a survey of U.S. workers.
The report, Franklin Templeton’s “Voice of The American
Worker Survey,” shows that workers in 2021 were most interested in increased
pay, with 51% choosing this option compared with 40% last year, and increased
401(k) matching (40% vs. 43% in 2020). Among U.S. workers, 29% are interested
in putting money into an investment that guarantees a portion of retirement
income in 2021, compared with 30% in 2020.
Jacquelyn Reardon, director of retirement marketing, U.S.,
at Franklin Templeton, says that the stat about interest in annuities and
lifetime income products is likely a bit deceptive, and that it’s important to
note some context, as “creating a reliable income stream for retirement is a
key need.”
Reardon explains that participants have not disavowed
lifetime income investments. “When asked to rank their most-preferred benefits,
U.S. workers said, ‘putting money into an investment that guarantees a portion
of retirement income’ ranked No. 3 for both years we’ve conducted this survey
after only an increase in salary and an increased 401(k) match—the most
traditional of benefits.”
Survey Says
The survey shows that more than eight in 10 employees (83%)
would be interested in a deferred annuity benefit, with 50% saying they would
contribute monthly and 30% saying they would consider contributing.
Annuities are lifetime retirement income products,
guaranteed by an insurance company, that retirement plan participants can
invest part or all their defined contribution plan balance in to create an
income stream in retirement. Participants who annuitize their savings will
receive a sum of money in exchange for purchasing the investment. Deferred
annuities, unlike other types of annuities, pay out to the owner a regular
income at some future date.
One piece of context that explains the survey response is that
some participants have a barrier to access to guaranteed lifetime income
investments, Reardon says. “Only 2% of employers currently offer access to this
highly in-demand benefit,” she explains.
Legislative Efforts
Lawmakers in Congress introduced the Lifetime Income For
Employees Act, or the LIFE Act for short, earlier this month, a bill that would
enhance the safe harbor on which plan sponsors rely when choosing an annuity
provider and allow annuities to be a default investment in an employer-sponsored
401(k). The legislation, which was introduced in the House, is a follow-up to
2019’s Setting Every Community Up for Retirement Enhancement Act.
The SECURE Act provided a safe harbor for employers when the
plan sponsor meets minimum fiduciary requirements in choosing an annuity
provider, which relieves an employer of the liability for any losses that could
result from the insurer’s inability to satisfy agreed-upon financial
obligations.
The SECURE Act also empowered the Department of Labor to
mandate that DC plan participants receive lifetime income illustrations on
their retirement plan statements, which show what their monthly income amounts
would be if their balances were annuitized.
Reardon adds that continued legislative efforts reflect more
work ahead, and that once the groundwork is complete, the financial industry
will follow.
“Whether in-plan or out of plan, it’s clear the need for
resources that support turning retirement savings into a reliable income stream
are crucial,” Reardon says. “And it’s important for our industry to continue
working toward creating solutions that meet this very important need.”
Advisers’ Take
Greg Adams, a consultant at Fiducient Advisors, says plan
sponsors don’t yet need to include annuities in defined contribution plans.
“The need is not acute yet,” he says. “We don’t want to put
more things into a retirement plan and complicate a retirement plan, just
because there’s a new shiny object out there. Most of our plans outside the
403(b) sector don’t contain annuities at this point.”
Adams says he is watching the space and that the firm is
monitoring options for different distribution strategies.
He is taking a wait-and-see approach to whether those
solutions are ripe for being included in plans. Participants are interested in
lifetime income products, but Adams explains that he wants to see how these
work in practice before jumping into the deep end.
“We need to see from a consulting and advisory standpoint
how it’s actually going to work in practice for the participants,” he says. “We
want to see that these products are actually creating additional value to the
participants; we want to see how complicated they are to administer.”
Fiducient has done its homework on the products available,
Adams adds.
“We’ve talked to some of the biggest ones out there about
annuity offerings, guaranteed minimum withdrawal benefits, guaranteed income
benefits, QLACs [qualified longevity annuity contracts], target-dates with
decumulation offerings—things that are going to make it more intuitive and
easier for participants to see what their retirement plan income is going to
look like,” he says.
Nonetheless, Adams is concerned that annuities are not
intuitive, are confusing for participants and are not transferrable
“We need to see if they’re going to be portable across
different recordkeepers,” Adams says. “If recordkeeper A has their proprietary
annuity product and the plan sponsor decides to make a change, what happens
with that annuity product?”
Additional legislation and guidance from federal agencies
would help bolster the use cases for annuities in plans, he adds.
“We also need the regulatory environment to give us the
guidance, the rules, the appropriate oversight from a fiduciary standpoint so
that we can feel comfortable including these types of products in plans and
make sure that we’re covering our fiduciary responsibilities,” he says. “We’ve
seen a lot of development in the regulatory environment over the past few years
with the SECURE Act—we’ve also got the RISE [Retirement Improvement and Savings
Enhancement] Act that’s pending and there’s some retirement provisions in the
Build Back Better Act and even a SECURE Act 2.0 that could start paving the way
for these products.”
The learning curve will be significant for plan sponsors and
participants to get accommodated to annuities and lifetime income investment
planning, Adams explains.
“That was a conversation that happened outside of the
retirement plan, that was something that occurred one-on-one with a financial
adviser or a financial consultant that specialized in retirement income
planning,” he says. “It’s a big unknown and even once we start, if we get to
the point where we feel comfortable adding these to the plan, there’s going to
be a huge learning curve that goes with it to get participants comfortable with
it.”
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