401(k)s were considering annuities -- then COVID-19 hit

The COVID-19 crisis has shifted the priorities of retirement plan sponsors, and once promising developments such as the addition of guaranteed income annuities have taken a back seat to more pressing matters.

Now sponsors are more concerned with managing CARES Act provisions and making basic adjustments to their plans, according to the results of a survey released Wednesday by T. Rowe Price.

Making plan assets available for CARES Act withdrawals and loans was the top priority among more than 5,500 plan sponsors the company surveyed. But sponsors said they would advise participants to use restraint and not take withdrawals unless absolutely necessary, according to the survey.

“While the CARES Act provisions were granted, the actual change of people tapping into [accounts], individuals suspending contributions or employers suspending contributions has been lighter than anticipated,” said Lorie Latham, senior defined-contribution strategist at T. Rowe Price.

The next biggest priority for sponsors in the COVID-19 world is cutting their costs with strategies that include suspending company contributions and seeking to reduce administrative expenses, according to T. Rowe’s report. Another priority is putting planned administrative changes or investment changes on hold, the survey found.

However, plan sponsors have shown interest in financial counseling programs for their workers, Latham said. And less urgent than that is reviewing investments, according to the report.

SECURE ACT CHANGES

Although the Secure Act made it easier for plan sponsors to include annuities in their 401(k)s and other plans, DC consultants were lukewarm on that subject. The likelihood of in-plan annuities being added was ranked fourth among other outcomes of the Secure Act by consultants, behind increased retirement plan coverage, improved savings and expanded business opportunities. They ranked the likelihood of the use of pooled employer plans, or PEPs, by companies that have existing retirement plans even lower than the use of in-plan annuities, according to the report. T. Rowe surveyed 20 DC consulting firms during January, February and April.

Read more: How does the SECURE 2.0 Act affect annuities?

“Annuities came in pretty low,” Latham said. “There’s still a question mark [for plan sponsors]. Do people want to be first?”

Past surveys have shown that participants are averse to the products, especially when they are called annuities, Latham noted. When they're described by product features, rather than being called annuities, participants said they would buy such products at about the same rate as managed accounts, for retirement income, she said.

The plan consultants surveyed said that sponsors are more willing to make simple changes to their plans to address retirement income than they are to add annuities. Steps such as revising plan documents to allow participants to stay in the plan after leaving the company and allowing systematic withdrawals for retirees are taking higher priority, Latham said.

In-plan annuities are “not off the table,” she said. “It’s certainly not going away, but for some plan sponsors ... it’s hit the back burner, while they deal with more immediate issues.”

The survey found a slight disconnect between consultants and plan sponsors around the criteria used to consider the default investments for participants. While both groups said longevity risk was the top consideration, consultants ranked behavioral risk as a close second, and sponsors cited downside risk as their next most important concern. Behavioral risk includes participants not saving enough or withdrawing assets too early, Latham said.

“Consultants have this ability to be ahead of the curve,” she said.