By Linda Koco
Contributing Editor
AnnuityNews.com
Feb. 15, 2011 -- Annuity options inside of 401(k) retirement plans are getting some advocates but the market remains a work in progress.
So-called “in-plan annuity options” enable retired workers to convert part or all of their 401(k) account into a lifetime income stream via an annuity. These are distinct from annuities that are offered outside of the 401(k).
Currently, 19 percent of employers say they facilitate annuities either outside or within a plan, according to recent figures from Aon Hewitt, Lincolnshire, Ill. The survey sampled views of 210 mid-to-large U.S. companies.
In addition, 13 percent say they plan to add an “in-plan” solution this year, the benefits consulting company says.
By comparison, various industry sources have said that only 2 percent or 3 percent of bigger employers were offering in-plan options a year or two ago, if that many.
The shift is significant given that the in-plan annuity market is still emerging and the fact that some employers are holding back, even if interested.
Not now
Some large employers are reluctant to adopt in-plan annuity options due to fiduciary liability issues or because they believe the time is not right to add the options to their plans.
“Under current law, the selection of an annuity provider is fraught with potential missteps that could result in continued liability for the plan sponsor well into the future,” said Janet Boyd in testimony last fall before a joint hearing of the Departments of Labor and the Treasury. The director of government relations-tax and benefits for The Dow Chemical Company, she said was speaking on behalf of the American Benefits Council (ABC). Many Fortune 500 companies are part of the ABC. “To rectify this,” she continued, “plan sponsors need clear, simple fiduciary guidance allowing them to make lifetime income options available to plan participants without risking a significant increase in potential fiduciary liability.”
Boyd also indicated uncertainty about the maturity of the market for lifetime income options within 401(k) plans. “Our assessment to date is that the current market is too immature to move in that direction anytime soon,” she said.
Other employers aren’t interested because they have heard that employee interest is low. Dan Campbell, practice leader for defined contribution administration for Aon Hewitt, confirmed that trend in government testimony last fall. Just 1 percent of participants in 401(k) plans that offer a traditional annuity form of payment elect the option when it is available, he said, noting that 14 percent of 401(k) plans today offer such an option.
Another objection, among consumers as well as employers, is that the federal government might mandate use of lifetime income options in 401(k) and other defined contribution plans. “There is a lot of disagreement” over this, said Phyllis C. Borzi, Assistant Secretary of Labor, Employee Benefits Security Administration (EBSA), in testimony last summer before the Special Committee on Aging.
Income options
In-plan options can include not only annuities but also managed payout funds and managed accounts with drawdown features, Aon Hewitt points out.
A few income products for this market combine elements of investing along with an annuity solution.
For instance, a few months ago, AllianceBernstein, New York, launched a multi-manager target-date fund that automatically invests in a guaranteed lifetime withdrawal benefit (GLWB).
Called Secure Retirement Strategies, the product is designed for large defined contribution plans. Plan participants retain “full access” to their account balance “at all times,” the company says, and the amount of lifetime income “may increase in good markets but will not decrease in poor markets.”
The insurance — essentially a group annuity — is backed by AXA Equitable Life Insurance Company, Lincoln Financial Group and Nationwide Financial, according to AllianceBernstein.
"Single-insurer products are available today,” noted Thomas J. Fontaine, head of AllianceBernstein Defined Contribution Investments, during the rollout.However, the multiple-insurer approach is a “must have” for the guaranteed retirement income offerings of large plan sponsors, he said.
Annuities offered in tandem with a 401(k) but not actually inside the plan are also emerging. Financial Engines, a New York based independent registered investment advisor, recently rolled out such an arrangement through its managed account program.
Callled Income+, this income option provides monthly payouts from employee 401(k) accounts to their checking accounts by using 401(k) investments early in retirement and an optional annuity later in retirement for a lifetime income guarantee. The monthly payouts are designed to last for life, Financial Engines says, noting that “insurance for the lifetime income is optional and purchased outside of the plan.”
The income payments are “unlikely” to go down in market downturns but are “likely” to go up in market upturns, the company says.
Rising awareness
In-plan annuities are still relatively rare. Last May, for instance, Alison Borland of Aon Hewitt wrote that her firm’s research found that “only 7 percent of 401(k) plans currently offer an insurance or annuity solution within the constructs of the plan itself.” The comment was part of her written statement submitted to the Department of Labor.
Still, discussion about income options for defined contribution plans appears to be increasing. Countless surveys in recent years have found that many baby boomers who are at or near retirement do not know how to manage their money for income purposes, or are worried about if their money will last a lifetime. This news is getting a lot of media play, upping the buzz about income products and plans, including those offered inside or alongside of 401(k) plans.
Another spur is the fact that the federal government has stepped up its inquiry into possible lifetime income solutions for Americans.
For instance, President Obama’s Task Force on the Middle Class gave the market a booster shot early last year by recommending promotion of "the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees' living standards will be eroded by investment losses or inflation."
In early February, The U.S. Departments of Labor (DOL) and the Treasury put out a news releaseannouncing a Request for Information (RFI) that solicits comments on such plans in the workplace. The purpose, according to DOL, was “to assist the agencies in determining what steps to take to enhance retirement security for workers in employer-sponsored retirement plans through lifetime annuities or other arrangements that provide a stream of income after retiring.”
EBSA posted the full RFI in the Federal Register on the same day[Federal Register: February 2, 2010 (Volume 75, Number 21)]. The posting appears under an “EBSA Proposed Rules” title, signaling that a rulemaking inquiry was underway. The RFI includes 39 questions about lifetime income options, many of them directly referencing annuities.
The initial cut-off date for RFI comments was to be in May, but people and organizations kept on making submissions past that date. By the end of November, EBSA’s website was awash with 793 comments, over half from citizens.
Some of RFI comments were favorable to the idea of using annuities for lifetime income. Others focused on new approaches that might mitigate current concerns about the products. Among the naysayers were several who objected to any proposed rule that would enable the government to mandate annuities as a lifetime income distribution option.
Uncertainty
Where the public side of the discussion is going is not clear.
In early January, EBSA hosted a web chat providing updates on various government initiatives including lifetime income options. In her opening remarks, as published on the EBSA website, EBSA’s Borzi said the government plans to continue its lifetime income initiative.
“We intend to continue working with plan sponsors, participants and other retirement experts to identify steps that we can take together to improve the likelihood that participants’ plan savings will last throughout retirement,” she added.
Borzi did not mention when this work would be completed but she did note that the government agencies “have not settled on any specific policy option at this time.”
She did not mention whether annuities are still part of the inquiry.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.
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