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may make the most sense for plan sponsors whose top priority is
ensuring that participants' savings retain some liquidity.
While many in the industry use these terms interchangeably,
GLWBs are technically different than guaranteed minimum withdrawal
benefit products. The former provide a guaranteed income
for life, while GMWBs guarantee the return until the depletion of
the invested amount.
Annuity windows. For plans that want to provide a wider
range of options, an annuity window works similarly to a brokerage
window, in that participants may use the plan platform to purchase
an annuity at institutional prices with their plan assets. While the
purchaser may be able to manage the annuity through the recordkeeper's
platform, his assets have moved to the insurer-seller.
" Annuity windows are starting to be viewed more favorably
because they're not an in-plan option, and they don't take
much, from a design perspective, to actually add, " says Evan
Holmes, a vice president and financial adviser with CAPTRUST
in Minneapolis.
Non-annuity options for income. Annuities might not be right
for every participant, and they are likely only part of the strategy for
those who utilize them, sources say. So sponsors need to consider
offering other ways that participants can turn their 401(k) into an
income vehicle. These might include allowing for systematic withdrawals,
income planning within managed accounts, or intelligent
withdrawal tools that help participants prioritize which accounts
to tap into to optimally stretch their nest egg.
Evaluating the Options
For sponsors ready to move forward with retiree income options,
working with an experienced adviser is important, Maffei says.
And " consultants are getting more astute as to how to review
these various products, " he says. " Because there are many differences
across multiple categories, you can't compare a guaranteed
lifetime withdrawal benefit directly with a fixed annuity. "
For plans with a diverse population, offering more than one
annuity type might be the best approach. It is important for sponsors
to understand their population, its use of the plan, and what
they see as their role to deliver income or help participants create
the income stream, says David O'Meara, head of contribution
investment strategy at WTW in New York City.
Other Factors to Consider
Two key factors sponsors must take into account are whether
they plan to stay with their existing recordkeeper long term and
whether that recordkeeper has a product that meets their needs
or permits integration from a third-party provider.
" If the priority is getting the annuity that best matches
your population, you may be looking at a recordkeeper switch, "
Richter-Gordon says. " That's one of the first questions for a plan
sponsor to ask. From there, you have many questions about the
most cost-effective trade-off of the solutions you're analyzing. "
In addition, consultants can help plan sponsors evaluate
the annuity provider. Given the long-term nature of annuity
contracts, the sponsor must perform due diligence, and document
it, in selecting a vendor with an established track record
and the financial stability to commit to multi-decade payments.
Finally, advisers can help the sponsor understand and
compare costs. This is easiest with fixed annuities, since they are
spread-based products with the cost built into the interest rate vs.
stated explicitly. Variable annuities or products that offer a guaranteed
benefit with the possibility of an upside typically cost more.
" A guarantee can be a strong benefit to participants, but
the headline [stated] fee can be challenging for plan sponsors
because it's significantly above, say, an investment [without] any
guarantee, " O'Meara says. " You'll have to pay for the benefit of
having a risky portfolio [whose value will] never go down, and the
premium on that can be rather significant. "
The safe harbor expansion under the SECURE Act still
requires plan sponsors to act in a fiduciary capacity when
selecting annuity options, Richter-Gordon says. That means
considering the value of the product, not only looking at price.
Ongoing Education
Some plan sponsors may decide to simply offer an immediate
annuity or an annuity window to participants at retirement, yet
this would be a " check-the-box " approach that often falls short of
the outcomes the sponsor wants, Maffei says.
" If you're a forward-thinking plan sponsor, you'll think about
how to incorporate that lifetime income vehicle while people are
saving, " he says. " Our experience has shown that if you only talk
to people about lifetime income at the end of their saving journey,
nobody takes [the offer]. You need to educate them along [the way]. "
That said, while it may make sense to talk to 40- and
50-somethings about annuities, it is also important to make sure
younger participants take up annuities correctly. For example,
Holmes says, it may be inappropriate for a participant in his 20s
to start paying into a guaranteed income plan and be responsible
for decades of the annuity's compounding high fees.
One way to focus plan communications on the most appropriate
use might be to add a retirement tier. Retirement tiers, or
a set of tools and products dedicated to retired participants, have
become an increasingly popular approach for sponsors wanting
to keep such participants engaged, Richter-Gordon says. And
it can be a helpful framework for plans that offer more than
one annuity option to their participants. The tier might include
tools to help participants select the right annuity or to explain
how an annuity works in concert with other income sources,
such as Social Security.
" The retirement tier provides education, products and services
to what used to be an accumulating population and did not include
retirees, " Richter-Gordon says. " There's a new set of educational
materials that plans have to consider for that audience. "
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