Annuities gain ground in retirement market

Despite initial concerns about portability, cost and complexity, annuities in defined contribution plans are slowly gaining momentum, according to a new report. The report, which was released late last month by Boston-based Financial Research Corp., concludes that record keepers are "expressing significant interest in income-guaranteed products and are actively conducting due diligence on the various products to determine whether or not they will be added to their platforms." To gain ground within DC plans, annuities should be delivered in a manner that participants can easily understand, according to the report, "Guaranteed Annuities in Defined Contribution Plans: Current Products and Future Prospects." "Simplicity can be achieved through mutual fund replication and dollar cost averaging. The product's place in the market will also be determined by age restrictions and brand." FRC released the report Jan. 30.

MARKET VOLATILITY

Meanwhile, annuities are likely to gain traction in the current stock market environment. That's because they are designed to offer a guaranteed rate of return — a feature that is bound to appeal to clients scared by the market's increased volatility of late, industry experts said. "We talk with participants every day, and I think it's fair to say that they derive comfort from an underlying guarantee in a period of extreme volatility," said Doug McIntosh, vice president of retirement income for Newark, N.J.-based Prudential Financial Inc., which began offering a group variable annuity rider as an option for retirement plans in January 2007. So far, 30 companies have signed up for Prudential's IncomeFlex program, up from 15 at the end of September. 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 through Merrill Lynch 401(k) platforms. In 2005, Genworth Financial Inc. of Richmond, Va., launched a group variable annuity 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. Terrence Morgan, president of OK401k Inc. in Oklahoma City, which advises companies on their 401(k) plans, believes that participants who properly diversify their 401(k) accounts will have adequate nest eggs and can begin to determine whether they want to annuitize once they are prepared to retire, but he doesn't believe that annuity products should be offered in an accumulation vehicle. He also believes that younger participants should not be purchasing annuities. "They're confusing participants," Mr. Morgan said about the insurance industry. "They're scaring the participants today." While these products initially were aimed at baby boomers, a wide range of consumers are purchasing them, said Luis Fleites, vice president and director of retirement markets at FRC. "It's a broader base of participants using it," said Mr. Fleites, who wrote the report. "It's not just the older participants." Mr. Fleites also pointed out that companies have different marketing strategies, and some are even attracting younger workers to the products. For instance, MetLife holds live seminars and web demonstrations for advisers and participants. Prudential, meanwhile, sends birthday cards to participants to remind them of their lifetime-income floor, Mr. Fleites said.

ADVISERS SKEPTICAL

Still, he said, advisers are critical of annuities within 401(k) plans. That's because many believe that it is confusing to employees to have an annuity product within an asset accumulation vehicle, Mr. Fleites added. It's a huge mistake to include annuity products inside a 401(k) plan, Mr. Morgan said.
"The VA industry wants to make a 401(k) plan into a Swiss army knife," he said. "They're trying to make it do too many things. A variable annuity and a 401(k) are two different animals. They're confusing two different issues. They're vampires, and they're trying to get their product in." Concerns about suitability mean that most of these products aren't being sold by advisers, Mr. Fleites said. "There will be a number of factors, and it'll take a while first for it to hit the adviser market," he said. Mr. Fleites said that portability is a concern with these products. The fact that these types of products were given the green light by the Department of Labor to be used as a qualified default investment alternative in automatic enrollment also is expected to propel these options, said Fred Conley, president of the institutional retirement group at Genworth Financial. So far, 10 companies are offering Genworth's ClearCourse product to their employees. "First adoptions take the longest," Mr. Conley said. "We think market education has helped. We expect [adoptions] to accelerate." Lisa Shidler can be reached at lshidler@crain.com.