Expect a Rise in Annuity Engagement

Interest in guaranteed lifetime income options in defined contribution (DC) plans is growing after the latest market downturn caused by the COVID-19 pandemic.

Research from Allianz Life found 77% of workers currently enrolled in an employer-sponsored plan would consider adding an option that offers guaranteed lifetime income, and 59% said they would specifically consider adding an annuity feature. Sixty-one percent of respondents said they are looking for more information on how annuities can be part of their plan.

Additionally, a recent Secure Retirement Institute (SRI) study found more than half of workers would be interested in a guaranteed lifetime income option if offered, and 61% said they would likely contribute.

Prior to passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which provided a fiduciary safe harbor for the selection of lifetime income products for retirement plan sponsors, the retirement industry only saw limited interest in in-plan annuities and has seen little implementation from plan sponsors, says Matt Gray, assistant vice president of worksite solutions at Allianz Life Insurance. “There’s still a lack of familiarity with the benefits of what an annuity can offer,” he adds. “Participants do seem to want guaranteed income, as well as more information, especially with these volatile times in the market.”

James Olson, a managing director at IPX, says he believes the industry will see an uptick in annuity engagement within the next 12 to 24 months. Prior to the market downturn, experts anticipated more communication surrounding the products, but only saw slight additions. “Due to COVID-19, there’s now just more interest among service providers, recordkeepers and participants,” he says. “Annuities can be a complicated product, but now it’s more of a component of a holistic retirement plan.”

Annuities have had a bad rap for some time now. Known as a bind between an individual and an insurance company, individuals will pay a lump sum of money for guaranteed payouts for life. Annuities are complex to digest, with several different types of annuities to understand, so discussing them with clients and participants can be a struggle for retirement industry professionals. Add in the fact that annuities have their own set of taxes and fees, and most individuals choose to rule them out from their options.

It wasn’t until the passage of the SECURE Act that the industry saw subtle interest among investors. And now, given the coronavirus crisis, the industry can expect to see even more talk about the options. “Prior to the SECURE Act, there wasn’t much interest or certainty. This has opened the door for consultants to understand the products and how they can turn the doors,” Gray notes.

Gray further adds that employers are educating themselves about annuities, given the rise in demand. “They’re starting to become more educated on analyzing these solutions for consideration in their plan, so that translates from them to their participants,” he continues. “It’s definitely a learning curve for all sources.”

More so than other generations, Millennial and Generation Z investors are expected to add guaranteed income options for their retirement savings. Because younger workers are less likely to have a pension or defined benefit (DB) option, a lifetime income opportunity could sound like an attractive feature, the SRI report finds.

In the study, nearly two-thirds of Millennials and Gen Zers said they are somewhat or very likely to contribute to a guaranteed income option, while 52% of Generation Xers and 42% of Baby Boomers felt the same. Since older workers have less time in the markets, there may not be much implementation coming from that group, Olson says.

Another motive for this growth among younger workforces is the fact that Millennials and Gen Zers will likely be risk-adverse investors, analysts find. These workers will search for products that provide a guaranteed income stream to avoid substantial losses, Olson says. “This workforce has seen market volatility so much more than other generations. These solutions resonate better with younger groups because of that,” he adds.

While retirement plan sponsors should expect to see an increase in participants searching for annuity options, they should also be prepared. While annuities are not new products, knowledge about their features is scarce for most investors, Gray explains. “It is a difficult topic, but there’s a lot of expertise within the industry to help bridge that knowledge gap,” he adds. “There’s a lot of experience, innovation and expertise in providing these.”

Olson says he believes service providers are responsible for designing simpler products—such as automatic features that include annuities—and providing participants with one-on-one education.