Industry leaders are divided on whether income options in 401(k) plans will succeed and become a popular product in the next decade.
Issues of portability, cost and complexity are still hurdles these products must overcome. Their success will depend on how quickly and how fast vendors can solve these issues, industry leaders said.
In recent years, a number of companies have started offering annuity products.
MetLife Inc. and Merrill Lynch & Co. Inc., both of New York, pioneered the income products in 2004 when they offered the Personal Pension Builder fixed annuity. The MetLife offering is sold via Merrill's 401(k) platform.
Newark, N.J.-based Prudential Financial Inc. began offering a group variable annuity rider as an option for retirement plans in January 2007. More than 45 companies are using Prudential's income product inside their 401(k) plans.
The firm expects that politicians will need to address some key issues about income in the 401(k) arena, said Dawn Kelly, Prudential vice president of global communications.
The financial adviser community will move away from commission-based transactional sales to fee-based compensation, and that will eventually lead individuals to make a choice about whether to spend money on advice or income guarantees, she said.
In 2005, Genworth Financial Inc. of Richmond, Va., launched a group VA offering called ClearCourse.
In early 2006, The Hartford (Conn.) Financial Services Group Inc. began offering Hartford Lifetime Income, an optional benefit for variable annuities that guarantees minimum lifetime income.
At the end of March, Boston-based John Hancock Financial Services Inc. began offering a product called Guaranteed Income for Life, which allows participants to purchase lifestyle funds with a guarantee during the accumulation phase as well as during the distribution phase.
Already, more than 200 companies have signed up for this offering, said Dave Longfritz, senior vice president and general manager of retirement income and rollover solutions for John Hancock. He is convinced that the products will continue to become more popular in 401(k) plans.
Read more: A closer look at the John Hancock 401(k)
"When we started working on this last year, we thought this was the future, but now we know for sure it is," Mr. Longfritz said.
Still, not everyone is convinced that the products even belong inside the 401(k) space, and some worry that they are too confusing.
Offering income guarantees inside a 401(k) plan confuses the purpose of the plan, said Fred Barstein, chief executive of 401kExchange Inc. in Lake Worth, Fla.
"I think there are two distinct phases — the accumulation phase and the decumulation phase," he said. "You've got to decouple those phases" Mr. Barstein said that he has looked at some of these options and is confused by them. "If I'm confused, try to start explaining this to a participant," he said.
However, there will be demand for these types of guarantees as people are living longer and trying to find ways to secure a monthly income, said Steve Weisbart, vice president and chief economist for the Insurance Information Institute in New York.
"They will be afraid of running out of money, and competitors will be competing for longevity guarantees," he said.
The problem, though, is explaining these products to participants, said Mark Bonhard, an insurance specialist at Dawson Wealth Management in Cleveland. "There are lots of moving parts," said Mr. Bonhard, whose firm manages more than $450 million in assets.
These products still have hurdles to overcome, said Bill Lowe, president of distribution for Hartford-based ING Wealth Management, a division of Amsterdam, Netherlands-based ING Groep NV. His firm has yet to pull the trigger on any type of insurance product inside a 401(k) plan.
LACK OF PORTABILITY
"These haven't been embraced by sponsors, for a couple of reasons. The No. 1 reason is, they lack portability," Mr. Lowe said.
He thinks that guarantees outside the plan are better than those inside a plan.
But these problems can be solved, and participants are craving guarantees inside the 401(k) plan, said Fred Conley, president of institutional retirement group for Genworth. He thinks that one of the most crucial components of the process is educating participants.
"To me, the biggest challenge we face — part of it — is that it's a new concept," Mr. Conley said.
These products will only improve, said Dave Marconi, manager of institutional-investment-product sales with The Hartford Life. He agrees that it is important that portability, cost and complexity be ironed out, "but another element is the ease of understanding the benefit and what it does for you."
