A new study focuses on the savings rate that people in a workplace retirement savings plan need in order to achieve a more secure retirement.
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.
Understand the 401(k) plan structure. For instance, Smith says advisors will need to be aware that the employer is the plan trustee and that the trustee has a fiduciary obligation to let employees know what is in the plan, the fees that are charged, etc. As for advice, the registered investment advisor or advisor provides that.
Help employees understand their plan and the role of the advisor in that particular plan.
Talk knowledgeably with the employer about the plan. Many employers already have 401(k) plans, but for most, the idea of including an FIA option is brand new. The advisor will need to be able to discuss the entire plan, and show how the FIA option can help employees achieve their retirement goals, Smith says.
Focus on advising, not selling. The advisor will need to become comfortable with providing guidance to participants, Smith says. “It’s a matter of saying, something like, ‘Here are your options and I will provide guidance that will help you choose the option that is best for your circumstances. For instance, if you are close to retirement and worried about account values not falling, the FIA might be for you.’”
Learn the FIA products, too
As for the FIA products, producers who are already familiar with FIAs will have a good background for discussing the FIA option in the 401(k). But they will need to remember that the FIAs in 401(k)s may have differences.
For instance, the National Life product lets employees see daily values of the FIA as they do the daily values of the plan’s mutual fund options, says Smith. By comparison, retail FIAs do not show daily values.
Advisors will also need to learn how they will be compensated. For instance, with retail products, the advisor typically has the option of taking heaped or trail commission options. But in the 401(k) market, that will likely change. For instance, in National Life’s FIA, “there is only one option—a trail option and the advisor receives it only as long at the advisor stays actively involved with the plan,” Smith says.
The products for this market may also have provisions that take that fee-based planning, such as that done by registered investment advisors, into account, he says.
An important factor is that whoever sells these products must be dual licensed, in insurance and securities. The advisor needs the securities license to provide guidance on the securities options and the insurance license to provide guidance on the FIA option.
Advisors can run into roadblocks when presenting the FIA option. For instance, some employers are vertically integrated with the record-keeper and third party administrator, Smith says. And a brokerage firm may be involved.
It might happen that one or more of those parties will tell the employer that “you can’t put a fixed indexed annuity on the platform" or that they "can't administer it,” he says. That would effectively block further discussion about the FIA concept. The workaround is for the advisor to partner up with an independent third party administrator and record keeper, Smith says.
One reason that offering fixed annuities, especially the FIA version of the product, has been slow to catch on is that it was difficult for carriers to put the FIA on the same platform as the mutual funds. The traditional fixed annuity business is still paper based, but in the 401(k) market, “everything needs to go from computer to computer,” Smith points out.
As a result, carriers have needed to change the FIA to make it all work, he says. These changes can range from building an electronic platform and allowing for daily updates to changing the compensation structure, handling the flows from the payroll deduction, and arranging for the FIA to be portable with guaranteed lifetime income rider intact upon employee termination before retirement.
As these factors get worked out, the market is likely to see more FIAs for the 401(k) market, Smith predicts.
“Mutual funds and other investments are important in a portfolio for growth and income,” notes Michael Kalen, CEO of 401(k) Marketing, a division of Futurity First, “but they cannot provide the security of income that the FIA can. This security is what many employees and employers want to include in their 401(k) plan as a savings option.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.