By Linda Koco
A new marriage could be in the making. This is the marriage of indexed annuities with 401(k) retirement plans.
The idea has been a topic of conversation for the past few years, but just a few weeks ago, National Life Group, Montpelier, Vt., took the next step: It unveiled SecurePlus VIP, a fixed indexed annuity (FIA) designed just for the 401(k) market. Issued by Life Insurance Company of the Southwest, a National Life Group subsidiary, it includes a guaranteed lifetime income rider.
Worth noting is that the product is structured to be a plan option inside of the 401(k), not an IRA rollover option.
The idea of offering annuities inside of 401(k) plans is not new. In fact, a survey by AON Hewitt, Lincolnshire, Ill., published in early 2012 found that 11 percent of the 500 surveyed large to medium-sized employers were already offering annuity or insurance products of some type inside of defined contribution plans such at 401(k)s.
In addition, among employers that did not yet offer in-plan annuity/insurance features, 16 percent said they were very likely/ somewhat likely to offer such features during the coming year.
But FIAs have not been players in this market up to now. For instance, the AON Hewitt survey says that annuity/insurance products that employers named as being in their plans included variable annuity features, guaranteed minimum withdrawal benefits, preservation of principal, and minimum annuity payouts, among others. FIAs were not on the list, presumably because the products had little to no role in the market then.
Today, however, FIAs may start to take a position. That’s because certain barriers to offering FIAs inside of 401(k)s have now been cleared away, says Shelby Smith. An economist who is executive vice president and director of strategic development for Futurity First, Rocky Hill, Conn., he has been following the FIA/401(k) hook-up efforts for several years.
In addition, he says, there is growing demand for a conservative investment option inside 401(k) plans that will help protect employees from outliving their money. It is likely that employers will want to offer products that will respond to that demand, he predicts.
More education required
Should Smith’s predictions prove out, that could that could lead to the forging of new relationships in the FIA market—and a new market segment for FIA professionals. But for this to happen, annuity specialists are going to have to bone up on the 401(k) market and also on the FIAs that are being developed for sale for inside of 401(k)s, Smith says.
“The majority of agents and securities reps have had no education on 401(k)s at all,” he explains.
In addition, annuity agents who already have expertise in selling FIAs in the retail market will need to become familiar with FIAs for the 401(k) market. The products still have upside potential and downside guarantees, as do retail FIAs, but they will differ in certain other areas.
Concerning 401(k) education issues, Smith ticks off several things that producers will need to learn about. Most of these are no-brainers for benefits specialists, but not so for producers who formerly focused only on insurance or securities. Examples include:
Understand the moving parts in a 401(k). This includes the role of the third party administrator, the record keeper, the plan sponsor and how the money flows in and out, Smith says.
Understand how to help the employee choose the allocation. The vast majority of plan participants do not change their allocation once they make their initial allocation between their 401(k) options, Smith cautions. To change this, “we think the agents should visit the workplace twice a year or so, and encourage the participants to come in for a review.” The frequent visits will have the added benefit of providing more opportunity to educate on the plan features, including the FIA option.