Getting annuities onto 401(k) plan menus

Retirement income has long been a shortcoming of defined-contribution plans. Insurance companies have tried for decades to tap into that business, mostly unsuccessfully.

But this year, thanks to the SECURE Act, insurers such as Nationwide and Lincoln Financial are rolling out new products for the retirement plan market, anticipating an eventual widespread incorporation of annuities into 401(k)s.

The SECURE Act, passed late last year, gives plan fiduciaries some amount of legal protection when they select products and insurers. Along with that, forthcoming requirements for lifetime income disclosures on 401(k) statements and an especially volatile stock market that has spooked investors bode well for the future of those products, insurers say.

“All those things coming together have made for an environment where this [opportunity] is riper than ever,” said Amelia Dunlap, vice president in Nationwide’s retirement plan marketing division. “We’re really excited about this perfect storm.”

Asset managers are also seeing opportunities. Earlier this year, BlackRock announced a target-date product that’s paired with fixed annuities from two insurers — Equitable and Brighthouse Financial. BlackRock, which previously explored the idea more than a decade ago, began developing the new product before the SECURE Act was introduced.

“Asset managers realize if they don’t partner with [insurance] carriers, then carriers will dominate decumulation,” said Tamiko Toland, head of annuity research at Cannex. “They don’t want to lose that [business].”

NEW DISCLOSURE RULES

Next year, annual statements from retirement plans will be required to include an estimate of the lifetime income participants might get if they were to purchase an annuity. The Department of Labor issued a rule outlining that requirement, which was part of the SECURE Act. Although that alone does not require 401(k)s to include insurance products, some predict that retirement savers’ increasing familiarity with the concept of annuities will prompt demand.

However, until products are widely included in retirement plans, people will more likely seek readily available retail products, Toland said.

In December, Nationwide is adding a fixed indexed annuity for clients in its retirement plan record-keeping business, called Indexed Principal Protection, and next year it plans to roll out three in-plan lifetime income options that are paired with target-date funds from several different managers.

“These are going to be on a target-date chassis, and I think that’s really important. American participants are really comfortable with target-date funds,” said Eric Stevenson, president of Nationwide’s retirement plans business. “That will really help accelerate the adoption.”

In July, Lincoln Financial introduced a revamped version of an in-plan guaranteed-income product that it has sold since 2014, a feature that is included in 31 retirement plans. The new version of the product, PathBuilder, can be used as part of a plan’s default investment option and incorporated as part of a target-date series. About 20% of the plans with the product use it within a target date.

“We’re guaranteeing and protecting their income much more than annuitizing what they have,” said Ralph Ferraro, senior vice president of retirement plan services and product solutions at Lincoln. Participants “always have access to their underlying dollars, without any type of surrender charge.”

Companies have been preoccupied this year with keeping their workers safe amid the pandemic and implementing the relief options of the CARES Act, such as letting people more easily borrow or take early withdrawals from their 401(k)s. Because of that, the early interest that insurers anticipated following the SECURE Act’s passage mostly disappeared, said Jamie Ohl, president of retirement plan services and head of life and annuity operations at Lincoln. But now retirement plans are again showing interest, Ohl said.

“We did see almost a complete stall following the SECURE Act,” she said. “We’re starting to see that that’s a bit in the rearview mirror, and now we’ve had a tremendous amount of discussions with consultants and plan sponsors.”

Prior attempts by insurers to bring guaranteed income into the 401(k) market have largely flopped. In 2012, one major retirement plan, the then-$18 billion United Technologies 401(k), offered promise. That plan, now at more than $31 billion, had signed on for a customized investment option that included guaranteed income components from three different insurers — Nationwide, Lincoln and Prudential Financial. 

Despite that promising sign, guaranteed income did not catch on more widely in 401(k)s.

Raytheon, which this year merged with United Technologies Corp., did not respond to a request for comment about the plan.

ANNUITY GENERATION

A recent survey by Nationwide showed that two-thirds of millennials and Gen Xers like the idea of a guaranteed-income component that would make 401(k)s more like personal pensions, Dunlap said.

And a separate Lincoln survey in September of more than 1,000 people found that 71% of workers said all employers should ideally include guaranteed income features in their 401(k)s.

People typically don’t think about buying annuities until they are near retirement, but including them in 401(k)s could lead to people committing to the products earlier in their careers and developing an “income mindset,” Cannex’s Toland said. “It creates more of a process that shifts you through products over time.” 

Retirement plan advisers are also warming to annuities, with 64% saying that they’re likely to recommend in-plan guarantees to clients, Nationwide found. Thirty-nine percent of advisers said they already do, according to that survey, which included responses from nearly 1,800 advisers and more than 800 investors.

Last year, about two-thirds of large defined-contribution plans offered some type of retirement-income option, though few of them are insurance products, data from Callan show. 

Most often, plan sponsors used a drawdown option or retirement calculator (33%) or a managed account service (25%), according to Callan’s survey, which largely included plans of $100 million or more. Just over 9% of those plans offer access to any type of guaranteed-income product, while less than 8% offer annuity placement services for participants, and about 5% include annuities as a form of distribution payment, Callan reported. 

The top reasons plan sponsors cited for not including annuities were being uncomfortable or unclear about the fiduciary implications, not getting a sense of need or demand for the products and having concerns about risks associated with insurers, Callan’s survey found.

Another hurdle has been portability: Employers haven’t been able to easily change plan providers and move their employees’ guaranteed-income assets along with the assets in mutual funds and other investments. 

Insurers have addressed that by offering to continue to oversee the guaranteed-income component of an account or to allow participants to move assets out of the products or roll into an IRA. 

Whether the products become truly portable depends on how willing different record keepers are to support a multitude of guaranteed-income products from a variety of insurers — an important detail that has yet to be worked out, Toland said.

SLOW BUT STEADY

Change happens gradually in the retirement plan market, and wider use of in-plan annuities “is not going to be soon,” said Deborah Dupont, associate managing director of retirement plans research at Limra’s Secure Retirement Institute. “It’s going to be slow growth, maybe over the next five to 10 years.”

Dupont noted that one reason plan sponsors have ruled out annuities in the past is cost. That will almost certainly remain a factor going forward, given a massive rise in excessive-fee litigation this year against plan sponsors. 

However, a benefit of guaranteed-income products designed for retirement plans is that they can have institutional pricing and aren’t sold on a commission basis.

“The cost associated with it is fair and it reflects the institutionally scaled pricing you see in a DC plan,” said Lincoln Financial’s Ferraro.

Dupont also argued that to catch on significantly in 401(k)s, annuities must be part of the qualified default investment alternative — the option participants are automatically put in when they join a plan.

“[For] the people who manufacture these, they absolutely have to be a QDIA,” she said. The products “are very complicated to explain. Participants aren’t going to choose them unless they’re [automatically] enrolled in them.”