Too many 401(k) advisors, and financial advisors in general, treat annuities as a four-letter word, but they might want to rethink their stance—especially in employer-sponsored retirement plans.
A new white paper from Principal Financial Group, titled The Retirement Income Dilemma: An In-Plan Solution, walks through how in-plan deferred income annuities offered within a retirement plan help future retirees manage different risks such as outliving their savings, downturns in the market and changing interest rates.
The company commissioned Bruce Ashton of 401(k) fiduciary powerhouse Drinker Biddle & Reath LLP to write the paper.
“Today’s retirees will live longer and face different financial issues,” Jerry Patterson, senior vice president of retirement and income solutions at Principal, said in a statement. “They may be entering retirement with mortgages, credit card balances and even student loans. The prospect of living longer, combined with higher fixed expenses, makes it even more important to strike a balance between investments that grow and investments that are guaranteed.”
The paper includes sections on:
- The risks retirees and near-retirees face when it comes to making their income last through retirement.
- How an in-plan deferred income annuity addresses more of these risks than other products available today.
- What steps a plan fiduciary should take to research options and make a prudent decision.
The paper also includes checklists for plan sponsors to use in researching different in-plan products and providers.
Principal launched an in-plan deferred income annuity late last year. Principal Pension Builder lets retirement plan participants make a lump sum transfer or direct future plan contributions to it, just like an investment option within the plan. Each transfer or contribution purchases a known amount of regular, guaranteed income in retirement.
When they near retirement, participants select the age they want to start receiving payments and what form those payments will take.
“We have been in the market for several months now and interest among advisors and plan sponsors has been very high,” Patterson added. They love the simplicity of the design and see it as a powerful way for employees to begin to set the stage for life without a paycheck. By making guaranteed income easier and more convenient to access through a retirement plan, millions of Americans can make progress today toward a more secure tomorrow.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
The guidance states providers and advisers need to check that any recent purchases are still in the best interests of their customers, with providers advised to offer extended guarantee and cancellation periods.
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