As inflation eats away at family budgets and more Americans become concerned about outliving their retirement savings, guaranteed lifetime income is popping up on the radar.
In fact, according to the TIAA Retirement Insights survey, more employees say they are very or extremely interested in guaranteed lifetime income within retirement plans than they were in 2020 (54% in 2022 v. 51% in 2020), and nearly half (48%) say their interest increased during the pandemic.
Employers have taken notice as well. Results from the Retirement Insights survey showed plan sponsors are cooling on traditional target-date funds – the qualified default investment alternative they’ve relied on for years.
Still, some employers have misjudged annuities, a major source of lifetime income, as hard to implement, expensive and unpopular with employees. I want to dispel some of the myths held by employers, focusing specifically on in-plan annuities – those found within defined-contribution plans.
Here are some common employer annuity myths, debunked.
Fact: TIAA’s Retirement Insights Survey found that 72% of participants consider “ways to obtain guaranteed lifetime income” as an extremely/very valuable benefit; and more than half are interested in an annuity within their employer’s retirement plan.
Myth No. 2: If I decide to remove the annuity product from my menu, I don’t want to risk participants losing the annuity benefits they paid for.
Fact: Today’s in-plan annuity products and providers often have options to allow participants to move their balance and/or benefits so that they may retain guarantees if the plan sponsor removes the annuity product from the menu.
Myth No. 3: If I decide to switch recordkeepers to one that doesn’t offer the same annuity, I don’t want to risk participants losing the annuity benefits they paid for.
Fact: In response to both the SECURE Act and changing consumer needs and preferences, many recordkeepers are now exploring how to support these products. Some have adopted (or are looking into) middleware that makes transitions from one recordkeeper to another seamless.
Myth No. 4: The fiduciary duty expectations for annuities are unclear relative to traditional investments.
Fact: The SECURE Act has laid out a clear set of criteria for fiduciaries to evaluate at the time of carrier selection as well as for ongoing monitoring. This simplifies the insurer review process for employers, negating the need for them to conduct ongoing review of an insurer’s capital requirements, liquidity and solvency.
Myth No. 5: Annuities are too hard to implement.
Fact: Annuities can be added to a plan in as few as five steps. Before beginning, benefits departments must have a frank conversation as to whether they want their plan to continue to simply be a tax-deferred savings plan or whether they want to take the steps to modernize it into a true retirement income plan. If the latter, then the first step is researching and selecting the category of lifetime income solution.
I envision a time, 10 or 15 years from now, when it will be as odd for a retirement plan to not have a lifetime income solution available as it is today for a plan to not have a target-date fund. In-plan lifetime income solutions can put employees on the path to retirement confidence and play a valuable role building retirement security and peace of mind.
Phil Maffei ismanaging director, corporate retirement income products, TIAA. He may be contacted at [email protected].