PLANSPONSOR - February/March 2021 - 33

PLAN DESIGN | INVESTMENTS
comfortable making the decision after
retiring and drawing Social Security. "
She shares an example of how one
client's circumstances informed a correct
choice. " If a factory worker has no personal
savings, low earnings and little in his
retirement plan, he'll rely heavily on Social
Security. We would assume it's best for
him not to purchase an annuity, " she says.
" However, we received a request for an
annuity from a woman in a similar situation.
We told her we couldn't annuitize
that much of her savings, but she argued
that she needed that $100 a month, as it
would go directly to pay something she had
already arranged for in her account. She
was trying to take care of herself. "
Hueler goes so far as to say that if an
annuity helps someone budget and stay on
track financially, it is essential. " We need
to take action based on the practical realities
of decisions individuals have to make. "
Immediate or Deferred
Vanguard 401(k) data show that the average
401(k) account balance is $106,478. How
much guaranteed income would this buy?
According to Dietrich, a simple calculation
reveals that a balance of $100,000
would purchase a 65-year-old an immediate
annuity of $460 of monthly income,
payable for his lifetime. Should that participant
annuitize this account?
It is hard to say, experts observe-and
nearly impossible for a sponsor to know.
Some people have a pension or other
savings, and, for some, Social Security will
replace much of their income. In those
cases, it might be preferable not to annuitize
DC assets but invest them for growth.
Although the immediate type are
what most people think of when discussing
annuities, a longevity, or deferred, annuity
could be a better choice. A plan participant
could buy a qualified longevity annuity
contract (QLAC) from his qualified retirement
savings, Dietrich says. This vehicle
lets the owner delay the start of payments
well beyond 72-the age by which participants
otherwise must begin taking
required minimum distributions (RMDs).
" If you buy an annuity today that
pays at a later age, by the time payments
start, the benefits will be bigger because
of investment returns or interest, " he says.
Based on a simple calculation, $100,000
will buy $3,500 in monthly income from a
deferred annuity, he says.
Deferred annuities are also more
economical for the insurer, which passes
its savings along to the buyer, says Hueler.
Specifically, if an annuity starts later, the
insurer makes fewer payments and has
more time to invest assets to match the
liability. " With an immediate annuity,
payments start earlier and the payout time
is longer, but if you wait to start payments
at age 75, the insurer gives you more. "
Put another way, she says, if an
investor needs a certain return immediately,
he would have to invest more to get
it, but if he will not need that return until a
later age, he could invest less.
These annuities are designed to
protect against longevity risk, even
starting as late as age 85, to ensure income
if the person depletes his other assets. Yet,
Hueler notes, " where we see most deferred
business start is at 75. It still provides a
beneficial uptick to income. A deferred
annuity starting at 85 looks fantastic when
longevity is considered, but people never
know how likely they are to live that long. "
Not surprisingly, if someone does not
Annuity Comparisons
Guaranteed income for life
Guaranteed income for life, for spouse
Cost-of-living adjustments
3 3 3 3 3
3 3 3 3
3
Guaranteed minimum withdrawal benefits 3 3
Protection against market losses
3
3 3 3
Access to one's funds, up to a specified limit 3 3 3 3 3
Potential to leave a legacy to heirs
3 3 3 3 3
Note: Chart includes annuity options not discussed in the article, for comparison's sake.
Source: Nationwide
expect to live long beyond 65, neither type
of annuity make sense, Dietrich says.
Simplifying the Decision
While the Hueler Companies platform is
an out-of-plan solution, discussions since
the SECURE Act passed have frequently
focused on in-plan annuity options. But,
says Hueler, the decision of whether to
offer in-plan or out-of-plan annuity options
confuses sponsors. " The real question is
not about the mechanics-neither is better
or worse-it's about when do participants
start the process of shifting their mindset
to securing income, and what are sponsors
doing to allow them and even encourage
them to do that, " she says.
Hueler says the real conversation
should be about creating a default-like
path to buying an annuity, similar to other
election events. " If a participant is eligible
at age 50 or 60 and wants to start moving
money to a secure account, he can elect
to do so. It's a commonsense approach
people can understand, and it's practical.
Sponsors understand the importance of
leading participants to a place where they
aren't faced with a huge decision.
" We have a model we call a 'defaultlike'
path that sponsors can implement
in or out of their plan, " she adds. " We say,
'Do what's practical and affordable and can
help participants.' " -Rebecca Moore
PLANSPONSOR.COM February - March 2021 33
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