PLANSPONSOR - December 2021 - January 2022 - 35

2022 INNOVATION ISSUE | ANNUITIES
Low Bond Yields
Most retirement investors today are
looking only to bonds to comprise their
fixed-income portfolio, but, with such
low yields, this becomes risky for delivering
desired retirement outcomes, Lau
notes. " Equities and riskier fixed-income
strategies are being adopted to produce
sufficient yield. This can lock in losses
and, in addition, create retirement portfolios
that are overweight in equities near
retirement, which subjects investors to
sequence-of-return risks. "
Lau cites findings in a survey of
advisers: To bridge the gap between
desired retirement income and yields
from bond portfolios, 38% have allocated
a portion of clients' portfolios to annuities.
Lau's calculations found that, with
the current low rates, a traditional 50%
stock/50% bond portfolio has a 37%
success rate in generating enough assets
for sufficient retirement income. He
calculated that replacing 20% of the fixedincome
allocation in a 70/30 portfolio with
a fixed-income annuity would increase
the success rate to 72%. " Investors and
advisers are increasing risk through more
equities and an increasing number of
investment types to generate retirement
income, rather than doing it efficiently
through annuities, " he says.
With the low interest rate environment,
buying income costs more in
general, either through bonds or annuities,
but annuities cost less than bonds,
Finke says. In addition, corporate bonds
produce low returns and have no guarantee,
and drawing income from bonds
means liquidating assets, while buying an
income annuity dedicates a sum of money
to the investment, he says.
" The idea that we can sit on the
assets we've saved and draw only interest
from them is no longer possible, " Finke
says. " We'll have to draw down assets
from accounts. Economists can't do with
stocks and bonds what they can do with
annuities. Retirees and near-retirees are
better off with annuities, but many don't
know how to implement that. "
Fifty-two percent of Americans
invest in target-date funds (TDFs), most
of which follow a glide path that ends up
investing the majority of investors' savings
in bonds, he observes.
TDFs Introduce Annuities
Nick Nefouse, managing director, head of
LifePath at BlackRock, says, without question,
TDFs are the best vehicle to introduce
annuities into DC plans. " Think of it as a
'build-on-what's-working' philosophy, " he
says. " There's been talk about offering an
investment that has an annuity option, " he
says. " An annuity, unlike a bond fund, is
guaranteed to go up every year. When the
market went down 10% during the financial
crisis, annuities didn't. "
Nefouse, however, says annuities
should replace just some of the bonds in
a QDIA-that bonds always add value in a
person's portfolio. " Why not build a portfolio
with the most optimal structure and
the most asset classes? " he says. " With
bonds, participants don't have to give up
any liquidity that they must with certain
annuities. "
" ... a traditional 50% stock/50% bond
portfolio has a 37% success rate
in generating enough assets for
sufficient retirement income. "
annuity window or putting annuities on
the investment lineup of a plan, but people
don't know how to use these products.
TDFs have helped participants thus far, so
why wouldn't we want to put something
in there that addresses longevity risk in
an automated way with a familiar structure?
We don't ask participants to determine
when it's best to buy TIPS [Treasury
inflation-protected securities], so it doesn't
make sense for us to ask them to determine
when it's best to buy an annuity. "
By embedding the option for lifetime
income directly into a target-date strategy,
he says, sponsors can deliver retirement
income in a simple and cost-effective way,
which increases outcome certainty and
gives participants greater peace of mind.
Hugh Penney, senior director
of compensation and benefits at Yale
University and a 2020 PLANSPONSOR of
the Year winner, says a significant feature
of the Yale 403(b) plan's qualified default
investment alternative (QDIA), a custom
TDF, is it has no bond fund. " Instead, the
group guaranteed-annuity investment
is akin to a high-performing stable value
BlackRock's LifePath Paycheck offers
the option to purchase a fixed annuity
at retirement by embedding annuity
contracts directly in the TDF. " Fixed annuities
are clean and simple-participants get
a guaranteed amount of money for the rest
of their life if they annuitize, " Nefouse says.
" Variable annuities are complex. There are
riders and guaranteed minimum withdrawal
benefits [GMWBs], for example,
that participants have to elect. "
Plus, costs tend to be lower with fixed
annuities, and they are easier for participants
to understand, Nefouse adds.
Just in terms of the retiree's quality
of life, Finke says, a study found that
people feel more comfortable spending
on things that improve their lifestyle if
they know their money will not run out.
Additionally, automated income in retirement
addresses investors' potential for
cognitive decline-when they might lose
the ability to make sound financial decisions,
he points out.
" Annuities in DC plans haven't taken
off yet, but this is coming, " Nefouse says.
-Rebecca Moore
PLANSPONSOR.COM December 2021 - January 2022 35
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PLANSPONSOR - December 2021 - January 2022

Table of Contents for the Digital Edition of PLANSPONSOR - December 2021 - January 2022

INSIGHTS
RULES & REGULATIONS
UPFRONT
ESG Interest Piqued
2021 Best in Class DC Providers
Ramping Up Offerings
Annuities Still Misunderstood
Student Loan Repayment
FIDUCIARY FORUM
INSIDE ANGLE
PLAN PROFILE
PLANSPONSOR - December 2021 - January 2022 - Cover1
PLANSPONSOR - December 2021 - January 2022 - Cover2
PLANSPONSOR - December 2021 - January 2022 - 1
PLANSPONSOR - December 2021 - January 2022 - 2
PLANSPONSOR - December 2021 - January 2022 - 3
PLANSPONSOR - December 2021 - January 2022 - INSIGHTS
PLANSPONSOR - December 2021 - January 2022 - 5
PLANSPONSOR - December 2021 - January 2022 - RULES & REGULATIONS
PLANSPONSOR - December 2021 - January 2022 - 7
PLANSPONSOR - December 2021 - January 2022 - 8
PLANSPONSOR - December 2021 - January 2022 - 9
PLANSPONSOR - December 2021 - January 2022 - UPFRONT
PLANSPONSOR - December 2021 - January 2022 - 11
PLANSPONSOR - December 2021 - January 2022 - 12
PLANSPONSOR - December 2021 - January 2022 - 13
PLANSPONSOR - December 2021 - January 2022 - 14
PLANSPONSOR - December 2021 - January 2022 - 15
PLANSPONSOR - December 2021 - January 2022 - ESG Interest Piqued
PLANSPONSOR - December 2021 - January 2022 - 17
PLANSPONSOR - December 2021 - January 2022 - 18
PLANSPONSOR - December 2021 - January 2022 - 19
PLANSPONSOR - December 2021 - January 2022 - 2021 Best in Class DC Providers
PLANSPONSOR - December 2021 - January 2022 - 21
PLANSPONSOR - December 2021 - January 2022 - 22
PLANSPONSOR - December 2021 - January 2022 - 23
PLANSPONSOR - December 2021 - January 2022 - 24
PLANSPONSOR - December 2021 - January 2022 - 25
PLANSPONSOR - December 2021 - January 2022 - 26
PLANSPONSOR - December 2021 - January 2022 - 27
PLANSPONSOR - December 2021 - January 2022 - 28
PLANSPONSOR - December 2021 - January 2022 - 29
PLANSPONSOR - December 2021 - January 2022 - Ramping Up Offerings
PLANSPONSOR - December 2021 - January 2022 - 31
PLANSPONSOR - December 2021 - January 2022 - 32
PLANSPONSOR - December 2021 - January 2022 - 33
PLANSPONSOR - December 2021 - January 2022 - Annuities Still Misunderstood
PLANSPONSOR - December 2021 - January 2022 - 35
PLANSPONSOR - December 2021 - January 2022 - Student Loan Repayment
PLANSPONSOR - December 2021 - January 2022 - 37
PLANSPONSOR - December 2021 - January 2022 - FIDUCIARY FORUM
PLANSPONSOR - December 2021 - January 2022 - INSIDE ANGLE
PLANSPONSOR - December 2021 - January 2022 - PLAN PROFILE
PLANSPONSOR - December 2021 - January 2022 - Cover3
PLANSPONSOR - December 2021 - January 2022 - Cover4
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