BGI and MetLife Collaborate on 401(k) Annuity Option

Copyright 2008 SourceMedia, Inc.All Rights Reserved On Wall Street September 1, 2008 1174 words SponsorMatch Puts a Dab of DB in DC Plans: BGI and MetLife Collaborate on 401(k) Annuity Option Paul Menchaca With its new SponsorMatch 401(k) option, Barclays Global Investors (BGI) is experimenting with behavioral finance: It is challenging plan participants to think about retirement savings as a step-by-step acquisition of future income, rather than the pursuit of a lump sum or "number." SponsorMatch, which officially launched on Aug. 15, is a new investment category for defined contribution plans. It combines a target date fund, managed according to BGI's own institutional investment strategies, with a deferred fixed income annuity provided by MetLife. By using a component of the employer's matching contribution to buy a future stream of guaranteed income, it attempts to inject-painlessly, from the participant's standpoint-some of the security of a defined benefit plan into a DC plan. "For many years the match has been underutilized by both plan participants and plan sponsors," said Tim Kohn, chief DC strategist for BGI. "That's why we call it SponsorMatch, and why we thought it would be important to focus on the match." With SponsorMatch, Barclays is stressing the importance of buying a deferred annuity incrementally over time-also called multi-phase purchasing-so that the participant smoothes the interest-rate risk. "If you were to retire today and you wanted to buy a $250,000 [immediate] annuity, you'd be subject to the market today or this month or this year," he said. "But we know the interest rates have changed over the past 20 years and they will certainly change over any participant's lifetime." BGI hopes that by marketing the advantages of buying a retirement income product over time, it will help attract younger participants and change their behavioral dynamics as it relates to saving. This means changing the younger participants' mindset and vocabulary. "A 23- or 24-year-old is now for the first time in his or her life not thinking about a lump sum in retirement, but thinking about how much money they can consume in retirement," Kohn said. "That is so important." But is it possible to make 23-year-olds think about saving for retirement? "That is definitely a concern, because you don't get them thinking about that," admitted Kohn. "That is why we have designed SponsorMatch first to be used as the match, as sort of the floor for everyone. We feel if we offer it first as a match everyone gets in there, the 56-year-old as well as the 23-year-old." "We're trying to change the language around the accumulation plan, so the message is not just 'Accumulate a big pile of assets' but 'Accumulate lifetime income,' " said Jody Strakosch, MetLife's national director for institutional income annuities. BGI chose MetLife as its SponsorMatch annuity partner largely based on MetLife's success with Personal Pension Builder, a deferred income annuity for retirement plans that's distributed by Merrill Lynch. The two firms first made contact in the summer of 2007, and the partnership was announced last March. "MetLife was one of the original writers of annuities in the United States and has one of the best credit ratings in terms of insurance companies," Kohn said. "They are just a very sophisticated institutionally focused organization that has the ability to partner with us and customize a very unique solution." Designing SponsorMatch Industry experts are welcoming a move back towards a defined benefit-like retirement option. "On at least two levels I believe that the BGI/MetLife collaboration signals a correction in course," said David Macchia, president and CEO of Wealth2K, a Canton, Mass., marketing firm that focuses on the financial services industry. "In light of the decades-long movement away from defined benefits, it's a welcome development that will result in much needed predictable retirement income for plan participants." Macchia, a member of the Boston-based Retirement Income Industry Association (RIIA), added that the collaboration between BGI and MetLife "also ratifies RIIA's long-held assertion that a trend away from one-industry retirement solutions in favor of cross-industry retirement solutions is both inevitable and important." Boston University economist Zvi Bodie agrees. "This type of product, which winds up with the 401(k) participant receiving guaranteed retirement income, ought to be the QDIA [qualified default investment alternative] for all DC plans," he said. "I argued with the Department of Labor about this when the safe harbor rules were being decided upon." SponsorMatch differs from the typical target date fund in two ways. First, its diversified basket of securities benefits from the same investment methods that BGI uses for institutional clients. Second, the bond component that's typical of most target date funds have been replaced with discrete units of a deferred fixed income annuity provided by MetLife. Just as a target date fund has the glide path where it gradually shifts assets toward bonds, SponsorMatch allocates more of a participant's savings to the MetLife annuity. The annuity allocation for the youngest workers might start out at 3% or 4% and ultimately end up at 53%. "Let's assume that a participant's employer match is $10,000," said Strakosch. "For a 25-year-old participant, five percent of the match would go toward a fixed income annuity, and the rest would go to an equity portfolio managed by BGI. At age 30, 10% of the match might go to income. Five years later, 25% might go into income," and so on. By age 65, the match account-distinct from the account holding the participant's personal contributions-might have grown to, say, $100,000, with about half of it set to produce a defined monthly income in retirement. The rest would be invested in the BGI-managed fund. At that point, the participant can still opt for cash or lock in lifetime income. In the meantime, the client enjoys the same perks as any other 401(k) participant: access to a lump sum on separation from the company, daily account balances, and full portability. "It's unique to have a well defined glide path that participants can see," Kohn said. Because BGI views the match as being under-utilized, it wanted to make its product as clearly defined as possible so participants understand how their savings are progressing. "We know that the [employer] match represents about a third of DC balances over time, so it's a meaningful component of a participant's overall savings," Kohn said. "Our studies and research have shown that most participants know they have a match, but if you ask them more about it they don't know where it goes and what the matching percentage is, so a lot of participants will even get it kind of confused." So far, BGI is offering SponsorMatch to the sponsors of the plans it manages. Could it eventually be offered as an à la carte option, perhaps even as a default option, in other plans? "We're working on it," Strakosch said. (c) 2008 Retirement Income Reporter and SourceMedia, Inc. All Rights Reserved. <a href="http://www.retirementincomereporter.com"> http://www.retirementincomereporter.com</a> <a href="http://www.sourcemedia.com"> http://www.sourcemedia.com</a>/ September 12, 2008 <div> <div class="x_nshr"> <center></center> <center><a href="http://www.lexis-nexis.com/lncc/about/copyrt.html" target="_new" class="x_pagelinks">Copyright © 2008 LexisNexis, a division of Reed Elsevier Inc. 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