Administration February 17, 2022

Managing Participants’ Interest in Guaranteed Lifetime Income Investments

The number of U.S. workers who are open to putting money into investments that guarantee a portion of retirement income fell in 2021 from the previous year, a new survey shows. But experts say that doesn’t tell the whole story.

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Plan sponsors that are busy building shelf space for guaranteed lifetime income investments should note that participant interest in putting retirement savings into such products fell somewhat in 2021, according to a survey of U.S. workers.

The report, Franklin Templeton’s “Voice of The American Worker Survey,” shows that workers in 2021 were most interested in increased pay, with 51% choosing this option compared with 40% last year, and increased 401(k) matching (40% vs. 43% in 2020). Among U.S. workers, 29% are interested in putting money into an investment that guarantees a portion of retirement income in 2021, compared with 30% in 2020.

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Jacquelyn Reardon, director of retirement marketing, U.S., at Franklin Templeton, says that the stat about interest in annuities and lifetime income products is likely a bit deceptive, and that it’s important to note some context, as “creating a reliable income stream for retirement is a key need.”

Reardon explains that participants have not disavowed lifetime income investments. “When asked to rank their most-preferred benefits, U.S. workers said, ‘putting money into an investment that guarantees a portion of retirement income’ ranked No. 3 for both years we’ve conducted this survey after only an increase in salary and an increased 401(k) match—the most traditional of benefits.”

Survey Says

The survey shows that more than eight in 10 employees (83%) would be interested in a deferred annuity benefit, with 50% saying they would contribute monthly and 30% saying they would consider contributing.

Annuities are lifetime retirement income products, guaranteed by an insurance company, that retirement plan participants can invest part or all their defined contribution plan balance in to create an income stream in retirement. Participants who annuitize their savings will receive a sum of money in exchange for purchasing the investment. Deferred annuities, unlike other types of annuities, pay out to the owner a regular income at some future date.

One piece of context that explains the survey response is that some participants have a barrier to access to guaranteed lifetime income investments, Reardon says. “Only 2% of employers currently offer access to this highly in-demand benefit,” she explains. 

Legislative Efforts

Lawmakers in Congress introduced the Lifetime Income For Employees Act, or the LIFE Act for short, earlier this month, a bill that would enhance the safe harbor on which plan sponsors rely when choosing an annuity provider and allow annuities to be a default investment in an employer-sponsored 401(k). The legislation, which was introduced in the House, is a follow-up to 2019’s Setting Every Community Up for Retirement Enhancement Act.

The SECURE Act provided a safe harbor for employers when the plan sponsor meets minimum fiduciary requirements in choosing an annuity provider, which relieves an employer of the liability for any losses that could result from the insurer’s inability to satisfy agreed-upon financial obligations.

The SECURE Act also empowered the Department of Labor to mandate that DC plan participants receive lifetime income illustrations on their retirement plan statements, which show what their monthly income amounts would be if their balances were annuitized.

Reardon adds that continued legislative efforts reflect more work ahead, and that once the groundwork is complete, the financial industry will follow.  

“Whether in-plan or out of plan, it’s clear the need for resources that support turning retirement savings into a reliable income stream are crucial,” Reardon says. “And it’s important for our industry to continue working toward creating solutions that meet this very important need.”

Advisers’ Take

Greg Adams, a consultant at Fiducient Advisors, says plan sponsors don’t yet need to include annuities in defined contribution plans.

“The need is not acute yet,” he says. “We don’t want to put more things into a retirement plan and complicate a retirement plan, just because there’s a new shiny object out there. Most of our plans outside the 403(b) sector don’t contain annuities at this point.”

Adams says he is watching the space and that the firm is monitoring options for different distribution strategies.

He is taking a wait-and-see approach to whether those solutions are ripe for being included in plans. Participants are interested in lifetime income products, but Adams explains that he wants to see how these work in practice before jumping into the deep end.  

“We need to see from a consulting and advisory standpoint how it’s actually going to work in practice for the participants,” he says. “We want to see that these products are actually creating additional value to the participants; we want to see how complicated they are to administer.”

Fiducient has done its homework on the products available, Adams adds.

“We’ve talked to some of the biggest ones out there about annuity offerings, guaranteed minimum withdrawal benefits, guaranteed income benefits, QLACs [qualified longevity annuity contracts], target-dates with decumulation offerings—things that are going to make it more intuitive and easier for participants to see what their retirement plan income is going to look like,” he says.

Nonetheless, Adams is concerned that annuities are not intuitive, are confusing for participants and are not transferrable.

“We need to see if they’re going to be portable across different recordkeepers,” Adams says. “If recordkeeper A has their proprietary annuity product and the plan sponsor decides to make a change, what happens with that annuity product?”

Additional legislation and guidance from federal agencies would help bolster the use cases for annuities in plans, he adds.

“We also need the regulatory environment to give us the guidance, the rules, the appropriate oversight from a fiduciary standpoint so that we can feel comfortable including these types of products in plans and make sure that we’re covering our fiduciary responsibilities,” he says. “We’ve seen a lot of development in the regulatory environment over the past few years with the SECURE Act—we’ve also got the RISE [Retirement Improvement and Savings Enhancement] Act that’s pending and there’s some retirement provisions in the Build Back Better Act and even a SECURE Act 2.0 that could start paving the way for these products.”

The learning curve will be significant for plan sponsors and participants to get accommodated to annuities and lifetime income investment planning, Adams explains.

“That was a conversation that happened outside of the retirement plan, that was something that occurred one-on-one with a financial adviser or a financial consultant that specialized in retirement income planning,” he says. “It’s a big unknown and even once we start, if we get to the point where we feel comfortable adding these to the plan, there’s going to be a huge learning curve that goes with it to get participants comfortable with it.”

Compliance February 16, 2022

Industry Support Voiced for LIFE Act’s Introduction in House

Financial services companies and retirement plan industry advocacy groups are rallying behind the legislation, which would allow plan sponsors to utilize default investments that include an annuity component.

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On Tuesday, U.S. Representatives Donald Norcross, D-New Jersey, and Tim Walberg, R-Michigan, both members of the House Committee on Education and Labor, announced the reintroduction of the Lifetime Income For Employees Act, known as the LIFE Act for short.

A day after the bill’s reintroduction, financial services companies and retirement plan industry advocacy groups are rallying behind the legislation, calling on the House and Senate to debate and pass it as expeditiously as possible. They say the bill is a logical next step that builds on the successes of the Setting Every Community Up for Retirement Enhancement Act, affectionally known as the SECURE Act among industry professionals and their clients.

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The two lawmakers say the legislation would allow annuities to be a default investment in an employer-provided 401(k), with the stated goal of supporting workers as they seek to build a steady, guaranteed income stream during retirement. Specifically, the LIFE Act addresses certain requirements in the qualified default investment alternative regulatory safe harbor that prevent some employers from being able to benefit from the safe harbor if they include annuities as part of their retirement plan’s default investment.

Paul Richman, the Insured Retirement Institute’s chief government and political affairs officer, agrees that the bill would help address the insecurity and anxiety that workers and retirees across America are feeling about their ability to accumulate sufficient savings to provide them with income that will last throughout their retirement years.

As evidence, he points to the IRI’s consumer research, which shows significant interest in protected lifetime income solutions, such as annuities, among U.S. workers. In one survey, he says, the IRI found that nearly eight in 10 workers would likely allocate a portion of savings to an in-plan annuity with a lifetime income guarantee.

“Current Department of Labor regulations governing QDIAs have created a barrier to using certain investments—including protected lifetime income solutions like annuities—that do not meet specific liquidity requirements,” Richman says. “The regulations have created an environment where savers who utilize their plan’s QDIA only invest in vehicles that build assets and contain no mechanism to convert those assets into guaranteed income during their retirement years.”

Scott Brooks, the chief operating officer of a firm called RealBlocks, also shared positive comments about the legislation. RealBlocks is a fintech platform that enables access to and liquidity for alternative investments through blockchain-based technology.

“Congress and the DOL are showing progress on making the large differences between defined benefit and defined contribution plans more fair with this move,” he says. “[We] applaud the use of annuity-like contracts and structures to solve for the distribution phase of DC plans. DB plans have always had this feature.”

Brooks says the DOL appears to be recognizing that “illiquid” investment contracts, such as annuities, will hopefully result in further progress toward the inclusion of real estate and alternative investments as part of the solution for DC plans. He says the proposal would make DC plans more comparable to DB plans, which have long benefited from both types of alternative investments, as well as guaranteed annuity payouts.

Thasunda Brown Duckett, CEO of TIAA, has also expressed her organization’s support for the LIFE Act. In an open letter published to recognize the reintroduction of the LIFE Act, she says annuities are vital to retirement security because they are the only products that can provide individuals with guaranteed returns and a guaranteed stream of income in retirement.

“Increasingly, retirement plan participants rely on their plan’s default product as their long-term investment strategy,” Brown Duckett says. “While many participants mistakenly believe the default option provides a guaranteed retirement income, most QDIA products do not. By amending the QDIA safe harbor, the LIFE Act will encourage more employers to adopt annuities as part of their default offering so that more Americans will be able to transition seamlessly from saving for retirement to benefiting from a guaranteed income stream when they retire.”

One industry professional who is marginally more skeptical of the LIFE Act wrote to PLANSPONSOR to make the point that, while it is a step in the right direction in order to solve the “decumulation challenge,” it is in reality a small step.  

“The lifetime income providers are not going to be in this business to lose money,” he notes. “They will necessarily have to price lifetime income solutions to avoid that, and if the government forces them to do otherwise, they’ll have no choice but to exit the business. If Congress wants to motivate lifetime income plans, they should ensure that plans whose primary purpose is to provide lifetime income, i.e. DB pension plans, are easy to start and to maintain.”

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