PLANSPONSOR - April/May 2021 - 18

TOTAL BENEFITS | COVER STORY
of just $217,000, with a median of $65,000. Thus, many people
will likely need assistance stretching those assets to meet potentially
decades of spending needs.
But plan sponsors have generally lacked motivation to add
annuities to their plan design, and, for those that have, uptake
by participants has been low. " Year in and year out, 10% or
less of plans offer guaranteed products, " says James Veneruso,
senior vice president and defined contribution consultant in the
Summit, New Jersey, office of investment consultants Callan.
" That's the state of the world. "
" Some years ago, we presented all of our DC plan clients
with the annuity platform of Hueler Income Solutions, " says Ed
McIlveen, chief investment officer (CIO) at Francis Investment
Counsel, in Brookfield Wisconsin, referring to a firm that
connects participants with institutionally priced annuities. " Of all
our clients, only two set up the interface with their recordkeeper. "
The need for DC plans to provide retirement income may not
be universal, however. " A retail firm might have an overwhelmingly
young employee population and a high level of turnover, "
says Doug McIntosh, vice president of investments at Prudential
Financial, in the insurance enclave of Hartford. " If that sponsor
came back to us and said retirement income doesn't make sense
in its plan, I would say to move on to the next prospect.
" But that's not most firms, " he adds. " Most have a dual
concern and want their folks to feel comfortable when it's time
to retire. There's also the workforce concern about people being
'retired at their desks,' and management wants to make room for
the next generation. "
Informed Decisions
Considering how many transactions with their plan are made
through defaults-enrollment, contribution rates and investment-few
participants make their own decisions, Veneruso says.
" That's until they retire, when they have to make what may be the
most important decision of their financial lives. "
" Sixty-eight percent of participants we surveyed report a
need for advice or support in managing to convert their assets
into a stream of income, " says Lorie Latham, senior DC strategist
at T. Rowe Price Associates in Baltimore. " And in a survey of
about 200 large sponsors, 59% said they recognized participants
need help in working out their retirement income, so there is
some alignment there. "
Retirement-stage investments are asked to meet the needs of
myriad prospective retirees, with different wants, capabilities and
demands for what to do with their savings. " People start saving
at different times, and some have pensions or IRAs [individual
retirement accounts], " says Geoffrey Dietrich, executive vice president
at Dietrich, in Plymouth Meeting, Pennsylvania. His firm's
ANNUA arm provides institutionally priced annuities to DC plans.
18 PLANSPONSOR.COM April - May 2021
" A target-date fund [TDF] can be one-size-fits-all for accumulation,
but retirement isn't one-size-fits-all, " Dietrich says.
" Everyone has different expectations for how long they will live,
and whether they want to spend everything, or have some to
leave to their grandkids. That's a big inhibitor to people buying
immediate annuities. "
" There's also the workforce
concern about people being
'retired at their desks,' and
management wants to make
room for the next generation. "
There is also an important philosophical angle to committing
to an annuity. DC participants are accustomed to inherent optimism-investing
in assets that grow and reaching for the upside.
A purchase of a traditional annuity is just the opposite-locking
in future returns at a point in time, but having to give up access to
assets, with little chance of reversing the decision.
Even those participants and sponsors that do grasp
annuities may have misgivings. " Economic theory suggests
that annuities are a good way for individuals and households
to manage their finances in later life, " says " The Value
of Annuities, " a recent working paper from scholars at the
Center for Retirement Research at Boston College (CRR):
" Nevertheless, take-up of annuities is far less than predicted
by theory. One reason might be that annuities are expensive,
in the sense that the expected return on a dollar of premiums
[is about 80 cents]. " The center's estimates are based on prices
available in the direct-to-consumer market.
In addition to a perceived high cost, individuals balk at
converting to immediate annuities because the choice is often
irrevocable. And in their evolution so far, DC plan annuities
typically have not been portable to new employers' platforms.
Veneruso notes that, even in the defined benefit (DB)
world, where annuities are considered the default solution, the
products are not all that popular with retirees: " The benefit is
set up to be taken as an annuity; one survey reports that only
27% of people take the lifetime payments, and the vast majority
take the lump sum. Why would we expect a DC plan to function
any differently? "
" Insurance companies provide a service through their
guarantees of annuities, and that comes at a cost, " says Greg
Porteous, head of DC intermediary at State Street Global Advisors
in Boston. His firm offers a TDF series that includes deferred
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