PSNC 2023: Addressing In-Plan Annuity Reluctance

Plan sponsors have not incorporated in-plan annuities because retirement plan committees are held back by fear of missing out on better offerings and concerned the plan will be stuck with the selection, according to industry experts.

Despite an increase in the retirement income conversation in recent years, in part driven by participants saying they want additional guaranteed income beyond Social Security, employers have remained reluctant to offer a retirement paycheck that can be paid out from an individual’s accumulated balanced by a guaranteed lifetime income annuity option, explained John Doyle, a senior vice president and defined contribution strategist, at Capital Group, at the PLANSPONSOR National Conference last week in Orlando, Florida. 

”While we can talk about the roadblocks and the reluctance that we’re seeing, one of the big issues right now is fear of making a decision and missing out on better options that [employers] think are coming in the near future,” Doyle said. “Talking to a lot of committees on the corporate side—large, small, mega, all different sizes—[there] is this hesitancy to make a decision.”

When Doyle is out talking to plan sponsors, he has found that their knowledge and comfort with adding annuities is low. Another reason employers may be reluctant to add annuities because the products are not familiar, he said.

“There’s an education process that is not a one-month process,” Doyle said.  “[That] may end up being a multiple year process with some of these committees to start to understand how to apply [guaranteed income] to their plans, address the demographics and need [and] go through the whole educational process.”

Given nonprofit entities’ greater experience with guaranteed lifetime income products, annuities have tended to be more prevalent in nonprofit and education employer-sponsored plans, as compared to corporate defined contribution plans, and nonprofits have added annuities sooner, adds Doyle.

“What I’m hearing from them is that 10 years from now, it’s going to be very common to have a guaranteed lifetime income solution in the plan, more likely as an opt-in not as part of the default,” he said. 

Achieving greater guaranteed income inclusion among plan sponsors will largely rely on one thing: simplicity, said Deana Calvelli, partner and managing director, at Creative Planning Retirement Services.

“[Employers want] simplicity, simplicity, and we’ve learned that lesson through many other areas of the retirement industry,” she said. “What’s interesting about what’s evolving [in corporate 401(k) plans] is that we often talk about 401(k)s for private sector being more progressive than nonprofit and this is something where it’s really the opposite. We’re really in the very early stages, as it relates to the for-profit sector in terms of embracing this.”

Employer reluctance to use annuities in-plan has also been driven by conversations about guaranteed income with participants that are starting nearer to the end of a worker’s career rather than at the outset of an individual’s working years, Calvelli added.  

“If [the retirement industry] changes that conversation and doesn’t wait until you’ve accumulated the assets but start it at the very beginning … we’re going to get a lot more employees that are going to buy in by starting the conversation early, not at the end,” she said.

Jeff Cullen, managing partner at Strategic Retirement Partners, noted that TIAA has used guaranteed income products in higher education employer’s plans for many years, allowing the plan sponsors greater comfort with the products. 

“These are not unsophisticated committees: this is Harvard, Yale, Princeton. these are some of the smartest investment committees in the country, and they’re doing it, but they have an advantage,” said Cullen. “They had a level of comfort because they’ve had the traditional annuity [and] they’ve had an annuity inside their plan for over 100 years.”

Tamiko Toland, managing director, head of lifetime income strategy and market intelligence, at TIAA provided hard figures with regards to the state of annuities as the qualified default investment alternative.

Incorporating annuities in the corporate plan-market, particularly as a default, “is seen as a very controversial thing, yet it’s actually something that we’ve been doing at TIAA as a default on our own recordkeeping platform,” she said.  “We are expanding out from there into other spaces, but I think it’s really helpful to put into context the fact that we are doing it actively and we have a significant number of plans that have adopted it and a significant number of participants.”

More than 250 corporate plan sponsors, comprised of 250,000 participants, are using guaranteed income as a default, Toland said.

Historically, TIAA distributed guaranteed income offerings in 403(b) plans, but has added headcount to grow its market share in the corporate retirement plan space.