Annuities are like olives, either you love ‘em or you hate ‘em.
But amid growing concern over an aging workforce, increasing longevity and the financial health of their workers, employers are seeing the value in guaranteed income sources, and adding solutions to their defined contribution plans.
The “2019 Lifetime Income Solutions Survey” from Willis Towers Watson found 30% of employers currently offer one or more lifetime income solutions, an increase from 23% in 2016.
An additional 60% of sponsors have not adopted lifetime income solutions but are considering them, or would consider them, in the future.
Lifetime income solutions include education and planning tools to help participants determine how to spend down accumulated savings during retirement as well as in-plan and out-of-plan options that create steady streams of income from DC retirement plans.
“Employer concern about their employees being financially ready for retirement has never been greater,” Dana Hildebrandt, director of Investments with Willis Towers Watson, said in a statement. “And while many employers are making headway to help workers save more, their efforts to transform individual savings into a consistent flow of income that will last a lifetime remain a work in progress. The increased adoption of lifetime income solutions is an exciting step in the right direction.”
When asked why they either adopted or are currently considering adopting lifetime income solutions, three in four respondents cited concern over an aging workforce and increasing longevity, a sharp increase from 45% in 2016.
Retirement readiness
A similar percentage cited their focus on retirement readiness, while almost half cited a shift from a defined benefit plan to a DC plan as their primary retirement plan for adopting a lifetime income solution.
Among those that offer lifetime income solutions, the most prevalent options offered are systematic withdrawals during retirement (88%), lifetime education and planning tools (70%), and in-plan managed account services (44%).
Less common are the solutions designed to help participants develop a steady flow of income in retirement, typically involving both an investment and annuity component.
Only 17% offer an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component, while 15% offer out-of-plan annuities at the time of retirement. In-plan deferred annuity investment options are also offered by 15% of these employers.
“While it’s encouraging more employers are embracing various lifetime income solutions, it’s disappointing relatively few have adopted what the industry sees as more effective income-generating solutions, such as annuities and other insurance-backed products,” Hildebrandt added. “However, employer interest in these options may pick up steam as they better understand the value and associated benefits.”
Indeed, more than four in 10 respondents that currently offer or are considering offering a lifetime income solution are considering adding an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component in 2021 or later, while 31% are considering adding an in-plan deferred annuity investment option.
About one in four are considering adopting out-of-plan annuities at the time of retirement.
Significant shift
Interestingly, there was a significant shift in why some plan sponsors are not currently considering lifetime income solutions.
More than two-thirds cited administrative complexities as a barrier to adoption, an increase from 53% in 2016.
Conversely, the percentage of employers who cited fiduciary risk as a barrier fell from 81% in 2016 to 62% this year.
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.
