Study: Annuities Sell Themselves if Promoted

Insurers, brokers, advisors and retirement plan sponsors could do more to communicate the value of annuities for employees to help the products gain broader acceptance, according to a new report.

Communicating the role annuities play is also important to overcoming the gap between what many companies actually offer and the annuity options to help workers secure a comfortable retirement, the survey of more than 1,000 defined contribution plan participants found.

Published by Prudential Financial, the report underscores what many annuity industry experts already know: when employees understand how annuities work, they have few objections to them in their retirement plan.

“If you just add a lifetime income option and nothing else, (retirement) plan satisfaction rises,” said Sri Reddy, senior vice president and head of Full Service Investments at Prudential Retirement.

Prudential found that 78 percent of plan participants said they were familiar with guaranteed lifetime income options and believe it’s “very important” to include them in workplace savings plans. In addition, 77 percent of respondents said they would choose an annuity option.

More than three-quarters of plan participants familiar with annuities consider it very important to include annuities in workplace retirement plans, the report found.

Millennials are the most enthusiastic about annuities and the automatic plan features — automatic enrollment and automatic escalation — found in retirement plans. The report is titled “The Ease of Automation and Guaranteed Lifetime Income.”

Already, about 35,000 defined contribution plans make use of in-plan annuities, but that still amounts to only 4 percent of all defined contribution plans. So there’s plenty of room left for other plans to add annuities as a default investment alternative.

Many workers, wary of 401(k) plan costs or simply beholden to inertia, still don’t maximize the benefits available to them.

Report Suggests Ways to Boost In-Plan Annuity Interest

The report is the fourth in a series of white papers examining how plan sponsors can help workers save for retirement. It is co-authored by Reddy and his colleague John J. Kalamarides, senior vice president of Institutional Investment Solutions.

The report suggests several ways for plan sponsors to collaborate with brokers, agents, insurance companies and mutual to meet the needs of employees:

* Greater use of automatic enrollment and automatic escalation and pair them with guaranteed lifetime income solutions that are part of a default investment.

* Reframe the default debate to counter the misperception that the automatic plan features are tantamount to a loss of control.

* Incorporate annuities into the discussion about diversification and asset allocation.

* Make re-enrollment a feature of best-practice plan design to help existing employees, not just new employees.

Because annuities are generally more suitable to employees approaching or in retirement, an in-plan annuity will help an employee overcome the volatility of a frothy market so that the account balance remains more or less intact when the time comes to execute a rollover.

“We know that when you have lifetime income, you achieve better outcomes,” Reddy said.

And while it’s true that annuities are more expensive than an index fund, it’s important to explain to employees that they are paying for: income that is guaranteed and backed by an insurance company that will pay out for as long as the employee is alive, he said.

The study was conducted from June 1 through June 22, 2015, by Nielsen, among respondents who were 18 or older, employed full time, participated in a 401(k), 403(b) or 457 plan, had a household income of $25,000 or more and accesses a current retirement plan.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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