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FEATURE | A CHANGED PERSPECTIVE
* Guaranteed investment products. Participants purchase
the product either with a lump sum at or near retirement or with
regular contributions from their paycheck. Either way, the owner
is paid a guaranteed return, say 1% to 3%, beginning at a specific
date in the future. If interest rates surge, such contracts may
include a provision that bumps up the potential returns.
* Guaranteed minimum withdrawal benefits tied to a
target-date fund (TDF). These products guarantee the owner a
minimum withdrawal-e.g., 4% or 5% per year-based on a
specific high-water mark for the account. In exchange for the
guarantee, the participant pays a fee, such as 60 to 100 basis
points (bps) annually. If he no longer wants to pay the fee, he
may transfer the money to another investment without penalty.
Or, he may put new contributions into other investments and
continue paying the fee on the " old " investment, maintaining
the guarantee on that account.
" There's a broad range
of needs and preferences
for guaranteed products. "
* Target-date funds with an annuity replacing part of the
bond-fund allocation. As the participant ages, the allocation to
the annuity grows, creating a guaranteed income stream that
kicks in at retirement.
* Traditional annuities. Here, a plan participant converts
all or part of his nest egg into an annuity at retirement. One
version is the qualified lifetime annuity contract (QLAC), into
which participants can put as much as 25% of their plan balance,
capped at $135,000, and start receiving payments at any time up
to age 85. Unlike with other annuities, money in a QLAC does
not count in required minimum distribution (RMD) calculations.
" Generally speaking, all of these, within the context of the
SECURE Act, signal an increased acceptance of qualified retirement
plans serving as decumulation vehicles, not just accumulation
vehicles, " Papson says.
Keep It Simple
Still, experts say, plan sponsors considering in-plan annuity
options for the first time should focus on straightforward products,
not the more complex variations. The simpler the product,
the easier it will be to understand the pricing and convey the
product's benefit to participants.
" Products without a lot of bells and whistles may be more
appropriate for a plan where you have a self-directed consumer
picking products, " says David Lau, founder and CEO of DPL
Financial Partners in Louisville, Kentucky. " Something that's
a simple accumulation vehicle that you can turn into an
income stream makes a lot of sense. Once you start adding
a lot of features, it starts getting expensive and difficult for
32 PLANSPONSOR.COM February - March 2020
nonprofessionals to understand them. "
Under the SECURE Act, plan sponsors still must consider
the cost of a given product and make sure it is " reasonable " relative
to the product's features. But this requirement also provides
necessary clarity to plan sponsors. They do not have to choose
the cheapest option, for one thing.
" Fortunately, the reasonableness of costs relative to features
is something that the marketplace determines, " says Fred Reish,
a partner in the Los Angeles office of Faegre Drinker Biddle &
Reath and chairman of its fiduciary services ERISA [Employee
Retirement Income Security Act] team. He explains: " Advisers
and plan sponsors can obtain marketplace data, and the data will
suggest that, for a particular kind of guaranteed product, the
prices fall within so much on the low end and so much on the
high end. That's the range of reasonableness. "
The range of reasonableness may go down as the marketplace
matures. Insurance companies are likely to start providing
more institutionally priced, transparent products, as that is what
the 401(k) market is used to, Reish says.
Even as many experts increasingly see annuities as a
necessary piece of the decumulation puzzle, the products still
have a bad rap with consumers. According to the 2019 Cannex
Guaranteed Lifetime Income Study, almost half of those surveyed
(46%) said annuities have too many terms or conditions, and the
same percentage said they are hard to understand and put you at
risk of losing access to your money.
While the SECURE Act removed a significant barrier to
in-plan annuities, it likely represents only the first step on a long
road to widespread adoption.
" The purpose behind this part of the SECURE Act is to
encourage plan sponsors to include guaranteed products in their
401(k) plan, " Reish says. " I think it may well succeed in that. The
next question is whether participants will use the products. "
The Education Component
To encourage participants to consider in-plan lifetime income
options, employers and providers will need to invest significantly
in education.
Teaching employees the true value of annuities may take
more than supplying income projections and digital calculators.
Some of the latter oversimplify the strategy and ignore the
important nuances. After all, two individuals with the same
asset balance may have very different income needs in retirement,
depending on the person's lifestyle, risk appetite, other
funding sources and health profile.
Plus, annuities are typically not an all-or-nothing option.
Participants can-and often should-opt to put just a portion
of their nest egg into an annuity, rather than investing it all or
avoiding the product entirely. " There is a broad range of needs
and preferences for guaranteed products, " says Keri Dogan,
senior vice president and tribe lead, retirement income, at Fidelity
Investments in Boston. " Some people-even if the guaranteed
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