PLANSPONSOR - April/May 2021 - 20

TOTAL BENEFITS | COVER STORY
annuities-forward-looking guarantees that retirees can claim
later in life. " There's a feeling among many sponsors that the fees
of insurance products aren't transparent, and, when they can't
figure something out, the default response is, 'It's too expensive.'
" But, if guaranteed income is worth the costs, the price will
bear that benefit, " he adds. " Unfortunately, in the DC world,
people are used to paying 10 basis points [bps] for an index mutual
fund, and the costs seem uncompetitive. "
A Nudge Toward Annuities
Given the long-term commitments involved in annuity
purchases-not just for participants, but for plan sponsors that
TYPES OF ANNUITIES
Deferred
Income
With deferred
income
annuities-aka
DIAs or longevity
annuities-
the contract
owner pays
the insurance
company a
lump sum for
guaranteed
lifetime income
that begins at a
future date, up
to 40 years later.
ACCUMULATION
Fixed account
managed by
insurance
carrier
DECUMULATION
Annuitization*
Fixed
These annuity
contracts
allow for
accumulating
capital on a taxdeferred
basis
and pay out
for a specified
term, or for life.
For a lump sum,
an insurance
company credits
the annuity
account with
a guaranteed
fixed interest
rate while
guaranteeing
the principal
investment.
ACCUMULATION
Fixed rate
DECUMULATION
Annuitization,
income rider†
Indexed
Fixed-indexed
annuities,
or FIAs, tie
earnings to
an index such
as the S&P
500. They also
guarantee
a certain
minimum return
and enable the
contract owner
to enjoy stock
market gains
and avoid
full losses in a
decline.
ACCUMULATION
Blended rate
through index
DECUMULATION
Annuitization,
income rider
Variable
VAs allow for
investing in
funds, taxdeferred;
benefiting
from
upside growth;
and keeping
underlying
assets liquid.
Owners can
view their
account values
and continue
to invest within
the annuity's
subaccounts.
Beneficiaries
may receive
remaining funds
as a death
benefit.
ACCUMULATION
Investment in
funds
DECUMULATION
Annuitization,
income rider
*Annuitization: The process of converting an annuity investment into periodic income payments,
annuitization is irreversible, and by it a client can lose cash value and a death benefit.
Note: A policy owner has a less restrictive means to generate an income stream from an annuity-
a rider. †
Rider: This insurance policy provision, typically for an extra cost, amends the terms of a
basic insurance policy, possibly adding coverage, or even restricting or limiting coverage.
Indexed
Variable
Aka buffer
or structured
annuities,
these typically
offer a degree
of downside
protection-i.e.,
a buffer against
market losses-
with limited
upside potential.
ACCUMULATION
Blended rate
through index
DECUMULATION
Annuitization,
income rider
Immediate
With these, aka
single-premium,
annuities, the
buyer makes
an irrevocable
purchase, and
payments start
within one
year of the
purchase date.
" Immediate "
refers to
immediate
annuitization.
ACCUMULATION
None
DECUMULATION
Annuitization
have to monitor the insurance companies long into the future-
federal legislation in 2016 provided sponsors with a limited safe
harbor on their choices of insurers, which was strengthened by
the Setting Every Community Up for Retirement Enhancement
(SECURE) Act, signed into law in late 2019.
Briefly, the new law gives fiduciary cover to sponsors that
choose established insurance companies that meet various state
requirements for writing annuities. It also increases portability for
annuities that participants own, enabling transfer, without penalties,
to a new employer's plan, if the plan will take it, or to an IRA.
But the SECURE Act stops short of creating a sponsor safe
harbor for annuities as a default. Accordingly, in the previously
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