The 2024 Game Plan for In-Plan Annuities
Providers say working strategies now in place for guaranteed income solutions to start winning over meaningful numbers of 401(k) participants
We’ve heard it before. Annuities within workplace retirement plans are poised for explosive growth, with doors opened by friendly provisions within the SECURE Act and SECURE 2.0 and ramped-up demand from a wave of “Peak 65” 401(k) participants looking to turn a part of their account balance into a guaranteed stream of lifetime income.
But the long road to winning over plan sponsors and participants has been an uphill one filled with roadblocks that has kept most players on the sideline to date.
With a lot of hard work and lessons learned, components for a successful annuities-within-401(k) plans game plan now appear to be in place. Will 2024 finally be the year in-plan annuities turn the corner and win over the workplace retirement plan market?
While many industry observers remain skeptical about the immediate prospects for serious growth in the uptake of annuities within 401(k) plans, it’s hard to deny that interest has indeed been ramping up since the SECURE Act was passed at the end of 2019.
One key reason? Americans are still very concerned about running out of money in retirement. Many (61%!) admit it scares them more than death itself, as a 2023 Allianz Life survey found.
Another 2023 study from the Minneapolis-based annuity provider found that two-thirds of Americans (66%) worry they will run out of money during retirement.
“We have seen that fear about an underfunded retirement is widespread. While many Americans use their employer sponsored retirement plan like a 401(k) as their main retirement account, most worry it will not be enough,” said Matt Gray, assistant vice president of worksite and middle markets at Allianz Life.
With that, he says interest in lifetime income options as part of a 401(k) is growing. “That same survey found that 67% said they would consider adding an annuity to their plan if it was available,” which is up from 59% in 2021. “These products are addressing the real risks to a retirement strategy that Americans worry about.”
In its 2024 forecast of coming trends in the retirement industry, the Institutional Retirement Income Council (IRIC), a non-profit think tank for the retirement income industry, said it anticipates more plan sponsors and industry stakeholders evaluating and adopting retirement income solutions and de-accumulation strategies for defined contribution (DC) plans, in an effort to increase retirement readiness and security.
“We might be at the tipping point when it comes to the adoption of retirement income solutions within a DC plan,” said Michelle Richter-Gordon, executive director of IRIC, noting how traditional pensions have become much less common in the private sector. “With the rise of DC plans such as 401(k)s, the responsibility for retirement savings and investment decisions has shifted from employers to employees. As a result, there’s an increasing recognition of the need to help participants convert their accumulated savings into a reliable income stream during retirement.”
A Nov. 2023 LIMRA survey said that while the vast majority of DC plans—an estimated 9 in 10—still had no in-plan option for generating lifetime-guaranteed income for retiring employees, that math appears to be changing.
The survey of private-sector plan sponsors with at least 10 full-time employees found that almost half (49%) of those that did not currently offer an in-plan annuity in their DC plan said that they have considered adding one at some point. About 3 in 4 claim that they will make this decision within the next 12 months, underscoring the intense current focus on these options.
Meanwhile, other LIMRA research shows there has been an increase in workers’ willingness to convert assets into lifetime-guaranteed income, which has increased 14 percentage points from 38% in 2017 to 52% in 2023.
“We are starting to see various providers share anecdotal insights and real-world examples,” Allianz Life’s Gray said. “Like other providers, we’ve participated in an increasing number of RFPs and have gone live with our product on multiple platforms. We are starting to see participant dollars flowing into these solutions across these plans and platforms and that is happening at an accelerating rate.”
Speaking of multiple platforms, Income America’s pioneering 5ForLife series of target date portfolios that provide guaranteed lifetime income is now live on over 5,000 retirement plans.
“We are portable on two national recordkeepers and will be live on two more, adding two of the largest recordkeepers in the country,” said Scott Colangelo, chairman and managing partner of Prime Capital Investment Advisors, who in 2021 brought Lincoln Financial, Nationwide, American Century funds, Vanguard, Fidelity and others together to create Income America 5ForLife.
“Most importantly,” Colangelo said, “interest from advisors in our product is reflective of what we thought would happen—they are seeking solutions like ours because we innovated around the things they were seeking—a fiduciary-friendly product, that discloses all fees, that is portable, is multi-insured and is very simple for employees to understand.”
EDITOR’S NOTE: This is the cover story from 401(k) Specialist Magazine Issue 1 2024. To read the digital issue, CLICK HERE.
Next page: Education a Big Part of the Game Plan
Education a Big Part of Game Plan
That gets to a core issue—annuities being traditionally known as complex financial products that confound and confuse most consumers—not to mention plan sponsors and even some advisors.
Teresa Hassara, senior vice president for Retirement and Income Solutions at Principal Financial Group, said better engagement and education is sorely needed—and that effort will be rewarded. “Plan sponsors that spend considerable time advocating for their plan, marketing their programs, tracking the statistics, and seeking out the participants who are not using their benefits tend to have much better results,” Hassara said. “Plan sponsors and providers need to continue working together to tailor communications, increase engagement, and adapt programs where they are not working.”
Matt Wolniewicz, President of Income America, said the first step to educating participants is to have a solution that is easy for them to understand, with the features they want: control, protection, and growth potential. “By emphasizing the many upsides of guaranteed income solutions, we can help participants begin to visualize a more secure retirement,” Wolniewicz said.
One of the industry’s most prolific road warriors, Wolniewicz said that in addition to Income America roadshows, he educates advisors and plan sponsors via webinars, conferences, and online education. “From our active social media channels to our ‘On the Money’ video series, we’re getting the word out about guaranteed income and its benefits.”
Wolniewicz said Income America is launching a roadshow in the second quarter of 2024 to help plan sponsors and advisors understand where to begin, how to compare options, and how to implement their chosen solution.
Gray said Allianz Life is actively contributing to the education of plan sponsors and advisors “by publishing our own research and thought leadership on crucial topics. This includes white papers on a range of topics from the importance of personalization to how to navigate the wide range of GLI options as well as digestible blogs from our knowledgeable team on topics across technology, product, and diversity, equity and inclusion.”
He notes that the latest white paper, “Product Reframed,” sets out to dispel common myths and misconceptions about GLI products and provide an actionable path forward for advisors to incorporate GLI in their practice.
If the needle is to be noticeably moved in adoption of in-plan guaranteed income solutions, those education efforts may very well end up being a key to the movement. That’s because even though participants are showing more interest, most plan sponsors still believe in-plan retirement incomes are too complex—at least according to a new study from Greenwald Research released in late January.
“Most plan sponsors believe income options with GLI would be best for participants,” said Greenwald Research CEO Lisa Greenwald, “but they have strong concerns about the complexity of those income options and the fees that come with them.”
The survey found that 59% of plan sponsors view in-plan retirement income options as too complex. Nearly one in three are concerned that associated fees will mean higher costs for their companies, while 30% are concerned about the additional administrative work that offering income options would require. Sponsors also remain concerned about ensuring that participants have enough choices of retirement income options on the menu.
“While this underscores the need for continued, foundational education on the retirement income category, the interest and perceived need for this type of solution seems quite real,” said study director Eric Sondergeld.
Allianz Life’s Gray agrees, pointing out that the market has made significant progress in the past 12-24 months in the technology, infrastructure, education and tools to support the integration and adoption of guaranteed lifetime income solutions.
“These products are no longer confined to theoretical discussions—we’re witnessing real-world integrations and launches happening across technology platforms, recordkeepers, and plan types,” Gray said. “This progress is evident across all plan types and sizes, with participant adoption steadily increasing. While still in its early stages, this is remarkable.”
Next page: SECURE and the DOL Rule
SECURE and the DOL Rule
The Department of Labor’s controversial proposed Retirement Security Rule, introduced at the end of last October, certainly has the attention of the guaranteed income solutions market. Many note that Congress worked specifically to expand access to annuities as a source of retirement income for retirement savers to help close retirement savings gaps with the SECURE Act and SECURE 2.0, and note that the DOL proposal seems to be at odds with that intention by limiting access—particularly for low- and middle-income savers.
Others think the rule would be beneficial.
“We’re keeping a close eye on the progress of the Retirement Security Rule. We believe it’s a positive step forward for end investors and those who serve them. Under the proposed rule, those who dispense financial advice would be held to a higher standard,” Income America’s Wolniewicz said.
He added that advisors must develop and implement a prudent process for selecting the right guaranteed income solutions for their clients, and should evaluate whether solutions are “fiduciary friendly” (i.e., non-proprietary, with fully disclosed fees, and portable between recordkeepers).
QPA’s Matthew Eickman points out that recent history suggests the Retirement Security Rule—whether adopted as is or with modifications to the proposal—won’t live a long life.
“If President Biden loses in November, the Republican president would almost certainly abandon the initiative. If President Biden is re-elected, the proposal’s opponents will go to great lengths to find a Federal court to strike down the regulation,” Eickman said. “Although the DOL did an admirable job of shaping the new proposal to address the fate of the 2016 regulation, I anticipate at least one Federal court will be willing to strike down the new version.”
That said, Eickman added that the adoption of the Retirement Security Rule could be really good for the in-plan guaranteed income market.
“If more advisors and brokers are subject to a fiduciary standard with respect to distribution and rollover recommendations, they may be much less likely to push participants to use their qualified plan accounts to buy expensive guaranteed income options in the retail market,” Eickman said. “Instead, participants will be more likely to leave money in plans, where they have potentially two levels of fiduciary support from the company fiduciaries and any third-party advisor or consultant.”
In a highly regulated industry in which plan sponsors have significant fiduciary responsibilities, Principal’s Teresa Hassara said it’s challenging to make swift decisions about their benefit dollars without proper due diligence.
“That said, I don’t believe in-plan annuities will ever gain high adoption until they are part of the QDIA. It can be incredibly difficult to manufacture a retirement income solution tied to the QDIA that is suitable for all plan participants but continual advancements in technology to support data gathering and personalization are making it easier,” Hassara added. “This is where we should be moving as an industry with plan sponsors, providers, and financial professionals working collaboratively to develop an infrastructure for communicating, educating, and advising participants on retirement income earlier in their lives.”
Colangelo adds that the clear and consistently stated friendly provisions of the SECURE Act and SECURE 2.0 are now helping annuities be viewed as broadly acceptable.
“Auto enroll, auto escalate, QDIA and TDFs all took many years to take hold,” he noted, adding that even though regulation made them permissable, there was hesitancy in being the first over the wall. “In this case, it has become so obvious that the DOL is behind these, and committees’ desire for these are ahead of consultants introducing them, leading to a more rushed environment of, ‘I better offer these to my clients or someone else will’ mentality.”
Next page: Winning the Game
Winning the Game
While addressing challenges facing widespread adoption of in-plan guaranteed income solutions, the industry subject matter experts 401(k) Specialist interviewed for this article generally expressed optimism for significant progress in 2024.
Perhaps the best reason for optimism, QPA’s Eickman concludes, is that at least a couple of the nation’s largest recordkeepers have worked with outside guaranteed income solutions to bring non-proprietary solutions to their participants and will make those available before the end of 2024. “Those companies haven’t developed their own solutions with a revenue-producing mindset, but instead have concluded: ‘We need to have these in order to compete in tomorrow’s marketplace.’”
For Income America, Colangelo says 2024 is the year. “With over 5,000 plans adding us, and our solution being added to so many of the biggest and best recordkeepers, demand can now be met with actual available solutions, leading to significant utilization,” he said.
Allianz Life’s Gray cautions we are still in the early stages of the in-plan guaranteed income solutions game, but acknowledges progress is being made. “There is still a lot of work to do, but we are finally past the tipping point on this. The focus, commitment, and investment is there to make this idea finally materialize and key stakeholders are embracing it,” Gray said.
This year is about rising tides, Eickman added, “which will float the boats of all who have worked to develop modern, participant-first income solutions.”
• CLICK HERE to read this article as it appears in Issue 1 2024 of 401(k) Specialist Magazine.
Next page: Annuities as a Bridge Strategy to Delay Social Security
Annuities are increasingly being looked at as a bridge to Social Security—allowing people to delay claiming Social Security until they at least reach full retirement age (67) and potentially until turning 70, when they can claim the highest possible benefits.
At age 62, consumers face a choice that can impact the rest of their lives: start or delay Social Security. If they claim at 62 in 2024, their benefits would be about 30% lower than if they waited to claim until 67. And the Social Security Administration will add another 8% to benefits for each year a person waits beyond full retirement age to start claiming, up to age 70.
While the circumstances for people vary and there is no one “correct” claiming age, the rule of thumb is that if you can afford to wait, delaying Social Security can pay off for most people over a long retirement. This is why many people are withdrawing money from retirement accounts like 401(k)s and IRAs in amounts similar to what they would be getting from Social Security, allowing them to hold off on claiming Social Security and locking in higher payments down the road. Annuities are also being utilized as a bridge strategy to help people delay claiming Social Security.
One example is a new fixed indexed annuity introduced in January by Nassau Financial Group called the Nassau Income Accelerator. The single premium fixed indexed annuity with flexible guaranteed lifetime income options is designed to help retirees delay, and therefore increase, their Social Security and other retirement benefits.
“Our goal in developing this product was to offer much more flexibility that would allow individuals to optimize all their retirement income sources,” said Phil Gass, Chairman and CEO of Nassau.
By providing options to receive higher income in the early years, Nassau Income Accelerator can help individuals delay their claim on Social Security and other retirement benefits and achieve a higher annual guaranteed income for life.
The Flex-Forward Income Benefit rider offers flexibility to choose higher income payments early on in exchange for lower income payments later. Consumers can elect the rider when the contract is issued and decide later what date to start income and whether they want level income for life or higher income for up to eight years. If they choose higher income in early years, they also choose how much higher.
“I expect to see more innovation around this idea, both for individuals and within retirement plans,” said annuity expert Tamiko Toland of Toland Consulting, LLC, in a recent post on LinkedIn. “While the annuity is a great source of lifetime income above and beyond Social Security, this product design gives a nod to the fact that the most efficient way to increase guaranteed income is through a delayed claiming strategy.”
Next page: Fidelity Rolls Out Immediate Income Annuity for Participants
Fidelity Rolls Out Immediate Income Annuity for Participants
A new solution allowing employees to convert all or a portion of their retirement savings—from a 401(k), 403(b) or 457(b)—into an immediate income annuity recently became available nationally from Fidelity Investments.
Fidelity announced on Jan. 25, 2024, the broad availability of Guaranteed Income Direct, providing consistent, pension-like payments throughout retirement.
“A key challenge for employees as they transition from saving for retirement to living in retirement is ensuring there’s enough predictable income to cover essential expenses,” said Keri Dogan, senior vice president, Financial Wellness and Retirement Income Solutions at Fidelity. “Many people feel anxious about how to generate income in retirement and want to reduce the risk of outliving their assets. Through solutions such as Guaranteed Income Direct, individuals can move into retirement with a greater sense of financial security, knowing they’ll be better able to cover their everyday expenses.”
Guaranteed Income Direct allows employees to set up pension-like payments by purchasing an immediate income annuity through an insurer selected by an employer. Currently, MetLife, Pacific Life, Prudential Financial, and Western & Southern Financial Group are available on the platform, with additional insurers to be added in the future.
Prudential, for example, recently launched Prudential SimplyIncome—a new single-premium immediate annuity, or SPIA—within employer-based retirement plans administered by Fidelity Investments.
“Prudential SimplyIncome provides a new decumulation option for plan participants looking for a predictable retirement income solution, delivered through a streamlined, tech-forward experience on Fidelity’s Guaranteed Income Direct platform,” said Ann Nanda, head of Future Growth Initiatives and Distribution Enablement at Prudential Retirement Strategies.
Fidelity research shows the number of retirees and pre-retirees deciding to stay in plan past their retirement date has continually increased over the past 10 years, with 65% of participants expressing interest in having guaranteed income options in their workplace plans. For employers, the feelings are mutual: 81% of plan sponsors would prefer to give retirees the flexibility to stay in plan and withdraw assets throughout their retirement years.
Fidelity’s announcement caught the attention of Annuity Research & Consulting’s Michelle Richter-Gordon, who addressed it during a recent webinar focused on critical information for annuity fiduciaries.
Richter-Gordon, who describes herself as an advocate for fiduciary behavior and an advocate for insurance solutions, said retirement plan advisors and consultants serving plans that use a a single premium immediate annuity (SPIA) marketplace platform are responsible for evaluating the services and the providers offered under that marketplace. “If that marketplace itself is not performing carrier due diligence, then the advisor or consultant on that plan relationship should be documenting its analysis of creditworthiness of those carriers that it allows its plan sponsor clients to use under that service,” Richter-Gordon said. “Insurance can be very useful, and a person who is acting as an ERISA investment advice fiduciary must do creditworthiness analysis.”
• CLICK HERE to read this article as it appears in Issue 1 2024 of 401(k) Specialist Magazine.
SEE ALSO:
• What’s Behind Record Fixed-Rate Deferred Annuity Sales
• Next 12 Months Could be Tipping Point for In-Plan Annuities