Could an indexed annuity with a guaranteed lifetime income rider become a viable retirement income option inside a 401(k) plan? And can independent agents interest employers in offering these products to employees?
Independent brokerage general agent Jim Pedigo has been researching questions like this for two years and his conclusion is yes.
In fact, he is working on setting up a couple of such cases right now. These will be his first in-plan accounts.
The approach could open up some new opportunities for indexed annuity specialists in the independent distribution channel, said Pedigo, who is a retirement planning consultant with Financial RateWatchers$ in Lake Mary, Fla.
The small to medium-sized size firms that independent agents typically serve do like the idea of having an in-plan annuity option to offer to employees, Pedigo said. He bases that conclusion on his contacts with employers as well as his research.
Employers like the guaranteed income stream the products will provide to plan participants once retired, he said. They like that the annuity accounts will have upside growth potential along with a guaranteed floor during the participants’ working years. And they like that they don’t have to leave their current plans in order to add the option, he said.
“They can either add the indexed annuity to the existing platform, or if that is not allowed, they can make it an outside plan asset that is still a part of the 401(k), in the same way as they might add a real estate investment trust option.”
Offering in-plan annuity options inside of 401(k)s and other defined contribution plans is not new. In-plan annuities have been available at least since 1999, according to a 2012 report from the President’s Council of Economic Advisors. But those products were immediate annuities, Pedigo said, and “their availability inside defined contribution plans has declined over the years, largely due to the liquidity restrictions inherent in immediate annuities.”
The landscape began to change in 2012, however. That’s when the Department of Treasury and the Internal Revenue Service issued a package of proposed regulations and guidance on retirement plans. The documents were designed “to remove impediments and otherwise ease the offering of lifetime income choices that can help retirees manage their savings,” the Treasury Department said at the time.
That regulatory package has opened the door to innovating new approaches for offering annuities inside of 401(k)s, Pedigo said.
A handful of very large annuity carriers now offer annuities inside plans for their own workers as well as for employer clients. Still, a 2013 survey by Aon Hewitt and cited by Society of Actuaries, found that only 10 percent of employer plans were offering in-plan annuities. “That leaves a lot of room in the market for growth,” Pedigo said.
So far, the annuities being considered for in-plan annuities tend to be variable annuities with income guarantees, or a mixture of variable and indexed annuities having such guarantees, Pedigo said. Of the two, the indexed annuities may have lower costs, depending on policy design, he said. Group annuities with deferred income annuity riders are available too, but he said “they typically don’t offer access to cash values at all times.”
Where’s the fit?
How might the indexed annuity fit into this new world? It provides employers with another annuity option to consider, Pedigo said, referring to individual indexed annuities that are portable, anti-discriminatory, and built with a guaranteed lifetime income benefit.
It’s voluntary, so participants can elect the option at will, and specify what portion of each contribution should go into the annuity. Participants can stop and start this election as they would with any other plan option.