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" I do believe that auto-income is
going to be the next automated feature
in defined contribution plans, following
auto-enrollment and auto-escalation. "
And rather than leaving employees to the mercy of the
annuity market-which observers such as Look acknowledge has
a poor reputation, thanks to a history of overcharging, overpromising
and underdelivering-steering them toward a product that
offers the same outcome but with some professional oversight
may sit a bit easier with some plan sponsors.
It is also a way to keep plan assets invested in the plan, notes
Verdeyen. That is a win-win for participants and sponsors, both
of whom benefit from the greater economies of scale, plus the
professional oversight the plan sponsor provides.
Finally, says Brendan McCarthy, head of the retirement
investing group at Nuveen in Boston, employees who take up
this product may be more likely to retire on time rather than
extend their career. " Reluctant retirees can be a big challenge
from a cost perspective, " he says.
McCarthy and others say guaranteed-income products offer
nothing less than " pension-like income. " " We believe that every
single defined contribution plan should have some kind of lifetime
income product because of the decline of defined benefit
plans, " McCarthy says.
Drawbacks
One of the biggest questions is how well the guaranteed income
products will perform through a range of market conditions.
Verdeyen, who is otherwise bullish on the category, stresses that
they are, so far, untested in that sense. They have been available
in 403(b) plans for much longer, but the demographics of participants,
as well as participant turnover, differs enough between
the two types of plans that it is hard to draw conclusions from
that experience.
What is more, Brown points out, the dust has yet to settle
from the outcry over how target-date funds in general performed
in the 2008 meltdown when participants close to retiring lost
20% of their assets.
DeLong says AB has received " very positive reactions from
participants in plans we work with-and more so when the
market started to become more volatile, because that's when
people in the guaranteed income component can see the fact that
their account value might be going up and down in the volatility,
but their income payments don't change. "
Another big question is about guaranteed-income funds'
fee structure. Public relations representatives for AB did not
respond to questions about fees.
A representative for Nuveen, which plans to launch a targetdate
fund Lifecycle Income Collective Investment Trust, notes
that the RetirePlus product currently offered by Nuveen's parent,
TIAA, for nonprofit clients has resulted in " QDIA [qualified
default investment alternative] cost reductions in the neighborhood
of 25% through 50%. "
While adding annuities might be expected to raise costs, the
CIT offers a more bespoke experience, the representative says.
" Because there's so much customization available, the fees can
vary, but fiduciaries have control and flexibility-whereas they
don't have that control with an off-the-shelf target-date fund. "
Nuveen and TIAA representatives declined to share the
timeline for the launch of that CIT.
Verdeyen, meanwhile, says she believes that " generally, the
investment management costs are not materially higher than in
a traditional target-date-fund plan. "
But some previous media coverage suggests that the fee
structure for at least one guaranteed-income product suite is well
over a full percentage point.
Look says the question of fees on its own misses the point.
" When you're looking at annuity solutions, you want to weigh the
richness of the benefit as well as the cost, " he says. " It's apples to
oranges if you only compare costs. Sometimes the cost is low but
the benefit is not as rich. "
The demographic makeup of the participant pool may also
be a consideration. For employers that are trying to phase out a
defined benefit plan, or that had one in the not so distant past,
guaranteed-income products may be a natural fit, Verdeyen
says. Also good candidates: those sponsors that have a higher
percentage of participants already invested in traditional TDFs.
In contrast, companies with a greater concentration of
lower-paid workers for whom Social Security may go a long way
toward replacing income in retirement may be less well suited.
In addition, the further layer of complexity from the guaranteed
income suggests a need for more participant education,
observers say-though that may also be an opportunity to
hammer home the idea that participant assets are best left with
the plan sponsor.
Right now, with only a few products on the market and no
sense of assets under management among them, another big
question is how the products' performance will be benchmarked,
says Brown. " There has to be some scale before we get there. "
On that, he and Look agree.
" There does seem to be interest from participants when
surveys are done, " Look says. " While there are a lot of guaranteed-income
solutions out there, many are only on one or two
recordkeepers. For a plan sponsor, there may not be many
options. I'd like to see more options, and more competition. It is
still early in this process. " -Andrea Riquier
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