PLANSPONSOR - December/January 2021 - 7

INDUSTRY ANALYSIS
In-Plan Guaranteed Annuities
T
hose in the retirement industry
have tried for years to tackle the
issue of individuals lacking a retirement
income strategy and the challenges
of offering in-plan annuity products. Why
this effort and concern about decumulation
after such a focus on saving? Experts
note concerns about employees outliving
assets or not knowing how to create
a drawdown strategy. The Department of
Labor (DOL) has also taken note, issuing
rules that provide for disclosing account
balances in terms of hypothetical regular
income payments.
According to BlackRock, plan sponsors,
providers and legislators are showing
growing interest in providing guaranteed
income options within defined contribution
(DC) retirement plans.
Such guaranteed income is provided
through annuities, which are insurance
products. Callan notes that these vehicles
rank high both in predictability and
complexity.
Still, these qualities highlight their
main issues, notes Peg Knox, chief
operating officer (COO) of the Defined
Contribution Institutional Investment
Association (DCIIA), in Washington, D.C.:
They can be seen as confusing and expensive.
But they also offer highly sought-after
predictable retirement income.
In addition, experts say, an objection
plan sponsors frequently raise to offering
an in-plan annuity option is that, while the
decision to amend their plan to add one is
not a fiduciary decision, the selection of the
annuity provider is. This means that the
addition of an annuity distribution option
increases potential fiduciary exposure.
This barrier to plan sponsors adopting
in-plan products that guarantee an income
benefit was addressed by the Setting
Every Community Up for Retirement
Enhancement (SECURE) Act. Signed on
December 19, 2019, with many provisions
taking effect January 1, 2020, one of these
addressed the products' portability problem,
offering a fiduciary safe harbor when annuities
are selected. It includes a checklist of
factors sponsors should consider when
choosing an insurance carrier to offer a
guaranteed lifetime income product; it
also mitigates risk by allowing fiduciaries
to rely on written representations from the
insurers regarding their status under state
Options That Plans Offer to Manage Retirement Income
2018
2019
No income product(s) offered
Systematic withdrawal plan at retirement
In-plan managed account with guaranteed benefit
In-plan managed payout fund(s) with monthly,
nonguaranteed income
In-plan insurance-based products with
guaranteed monthly benefit*
Out-of-plan annuity purchase/bidding service
insurance law.
For sponsors considering adding such
options to their plan menu, understanding
the types of annuities available to retirement
plans and how they work is important.
" There are several considerations
when looking at any annuity, including the
objective of the funds, the time horizon
and the tax consequences, " says Jason
Field, a financial adviser at Van Leeuwen
& Co. in Princeton, New Jersey. " The
purpose of most annuities is to provide an
income stream for retirement. "
We analyzed data from the
PLANSPONSOR Defined Contribution
Survey for the past three years to determine
retirement income option usage.
Adding in-plan insurance-based income
products that guarantee a benefit was
consistently below 10% and increased only
slightly to 12.5% this year, despite the safe
harbor. As this survey was fielded over the
summer, and committees take time to
consider adopting new investment options
or changing plan design, it may be too
early to see interest in in-plan guaranteed
products reflected.
BlackRock wrote, " When plan spon2020
46.2%
47.7% 44.2%
44.5% 44.3% 44.4%
27.1% 24.4% 29.6%
10.1% 10.0% 11.1%
9.9% 9.2% 12.5%
5.4% 5.2% 6.5%
*Designated as safe harbor by the SECURE Act.
Sources: 2018, 2019 and 2020 PLANSPONSOR Defined Contribution surveys
sors choose guaranteed income, surveys
suggest that investors are more satisfied
than those who try to manage retirement
spending on their own. "
In-plan managed accounts with guaranteed
benefits increased from 24.4%
in 2019 to 29.6% in 2020, not surprisingly
as fees for managed accounts have
come down. And in-plan managed payout
fund(s) with monthly, nonguaranteed
income increased slightly from 10% in
2019 to 11.1% in 2020. Systematic withdrawals
remain the most common form of
retirement income.
The broader adoption of income
options is evidence that plan sponsors are
seeking help with this issue-and investment
and insurance providers are creating
solutions to fill their demand. -PS
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