Adviser Joe DeNoyior believes the promise of a guaranteed income for life can be a game-changer for employees investing in 401(k) retirement accounts.
Yet the product best-positioned for the task — the annuity — comes with challenges that make it a tough fit for such defined contribution (DC) retirement plans. It is not just that an annuity can be costly and operationally complex; the product is also legendary for its jargon. Focused on mixing insurance with investments to guarantee returns, the annuity boasts contrasting features such as “death benefits” and “lifetime income riders”.
“It is hard for advisers to talk about annuities to the retirement plan, and it’s tough to talk about them with consumers,” says Mr DeNoyior, president of the Washington Financial Group at Hub International and among this year’s FT 401 advisers.
Yet the tide may now be turning in favour of annuities, especially when it comes to adding them to DC plans and individual retirement accounts (IRAs). Annuities have strong growth potential in these markets, which represent 62 per cent of the US’s $32.3tn in retirement assets — or just above $20tn — as of December 2019, according to the Investment Company Institute.
Enter the Secure (Setting Every Community Up for Retirement Enhancement) Act. It is a bipartisan law approved by Congress last year that offers improved immunities to employers offering annuities in workplace savings programmes. The Secure Act protects plan sponsors from the liabilities when selecting approved annuity providers if an annuity insurer subsequently cannot meet its obligations. The hope is that plan sponsors will gain more confidence in offering such annuities with these risks removed.
Experts agree that the act is a big step forward for providing guaranteed income in retirement accounts — but they also acknowledge it is no “flip-of-the-switch” moment. Indeed, for annuities to be distributed widely in DC plans, a co-ordinated effort is needed from advisers, employers, retirement plan recordkeepers and annuity providers. And the checklist for this group is exhaustive, encompassing everything from creating a fluid way to transport the products to different employer savings programmes to educating consumers about how annuities work.
Barbara Delaney, a principal at Hub affiliate StoneStreet Renaissance, says the industry must help develop record-keeping platforms that allow annuities to be transferred efficiently between different employer-sponsored plans, as well as from an employer’s DC plan to an individual retirement account (IRA).
Currently, a company could offer an annuity to employees via their workplace retirement record-keeping platform but then it would be unable to move it to another recordkeeper’s system, says Ms Delaney, an adviser listed in the FT 401 whose firms advise plan sponsors. The deficiency means the annuity’s promise of lifetime income for employees would end prematurely when either a worker leaves a job, or a company switches plan recordkeepers.
For adviser Chad Wilson, co-founder of Fiduciary Plan Advisors at Hightower, the problem ranks among the top barriers preventing annuities from growing more deeply into the retirement market. It sits alongside obstacles such as the high cost of annuities and liability issues — which the Secure Act seeks to address, says Mr Wilson, whose company advises retirement plans.
“The lack of portability means it is impractical for a plan sponsor to change recordkeepers, even if they have concerns about the financial health of the annuity provider,” notes Mr Wilson, who is also listed among this year’s FT 401 advisers. “This rigidity is a strong deterrent to including annuities in a retirement fund.”
Meanwhile, if employees are invested in more liquid mutual funds, such record-keeping changes are seamless, giving them an operational edge, experts say. “You don’t want your employees buying a product and then losing the guarantee” if the company changes retirement recordkeepers, says Mike Harris, the senior education adviser at the Alliance for Lifetime Income. “It is not fair.”
The Alliance for Lifetime Income, a non-profit backed by a coalition of financial services groups, is working on eliminating this barrier through education, as well as raising awareness about the benefits of annuities and helping ensure there is financial assistance available on using the products properly, Mr Harris says.
Part of the public outreach is eliminating the jargon that makes annuities confusing. Ms Delaney says: “Plan sponsors don’t know the difference between terms such as ‘in plan’ or ‘out of plan.’ They want money guaranteed. We have to be careful with lingo in this business.”
Todd Colburn, a wealth management adviser with the Northwestern Mutual Wealth Management Company, and among this year’s FT 401 advisers, concurs. “This is the biggest challenge,” Mr Colburn says. “It’s difficult enough to effectively communicate and educate employees as to how much they should save . . . and how to invest. This is such a specialised topic that it warrants its own forum” for communication, he adds.
Get alerts on Pensions industry when a new story is published