Including annuities in 401(k) plans could represent a prime opportunity for advisers — if a new model for compensation can be devised and if advisers are allowed on-site to explain their product to employees, according to industry experts.
CHICAGO — Including annuities in 401(k) plans could represent a prime opportunity for advisers — if a new model for compensation can be devised and if advisers are allowed on-site to explain their product to employees, according to industry experts.
The 401(k) is the most prominent product within the defined contribution market, representing 86% of private DC assets as of 2006, up from 68% in 1996, according to a recently released study by Boston-based Cerulli Associates Inc.
Assets in 401(k) plans reached an estimated $2.5 trillion in 2006, an amount that Cerulli analysts expect will grow to $3.7 trillion by 2011.
A significant shortcoming of the 401(k) plan, however, is that it does not easily convert into lifetime income for the long-term needs of retired participants. Filling this gap represents an opportunity for advisers who offer lifetime annuities to work with service providers and plan sponsors to implement such a solution, says the report, “You Can’t Get There from Here: Determining Direction to Capture Retirement Opportunities.”
Only 40% of workplaces allow advisers on-site. But that may change under a provision in the Pension Protection Act of 2006 that directs the Department of Labor to simplify and clarify regulations for annuity options within 401(k) plans, which could make it easier for advisers to get in the door.
The annuities being considered for inclusion in the 401(k) plans are immediate annuities, so the “double tax deferral” objection to including variable annuities in retirement plans that already are tax deferred does not apply.
Slow to start
In their short history, annuity products in 401(k) plans have gotten off to a slow start. MetLife Inc. and Merrill Lynch & Co. Inc., both of New York, pioneered such products in 2004 when they offered the Personal Pension Builder fixed annuity. In 2005, Genworth Financial Inc. of Richmond, Va., launched a group variable annuity offering called ClearCourse, and last year, The Hartford (Conn.) Financial Services Group Inc. began offering Hartford Lifetime Income, an optional benefit for variable annuities that guarantees minimum lifetime income. The Hartford is targeting plan sponsors with assets of least $500 million but hasn’t had any takers yet.
The success of these plans, said industry leaders, hinges on participants’ getting advice to help them decide on the best course of action.
“Offering advice at the work site can be an effective strategy that encourages participants to not only think about annuities but also consider all of the options available to them,” the Cerulli report states.
Plan sponsors that have been reluctant in the past to bring in fee-only advisers to assist their employees in investment decisions will likely feel pressure to start doing so, said Karen Altfest, vice president of L.J. Altfest & Co. Inc. in New York.
To increase the odds of a company’s allowing advisers in, she suggested getting on the list of the company’s approved professionals, asking current clients for an introduction, knowing the regulations and learning the specifics of the prospect’s current plan.
“I think it’s important to have someone from the outside who can be objective and explain the different products,” Ms. Altfest said. “I’ve heard more companies are going outside than ever before. They used to be afraid to offer advice, and now it may switch to where they are afraid not to offer advice.”
High-pressure pitches
But some think that it isn’t a good idea to encourage advisers to enter the workplace.
“The single worst thing that a 401(k) plan could do to their employees would be allow a bunch of commission-crazed annuity salesmen to pollute their plan,” said Frank Armstrong III, a certified financial planner and president of Investor Solutions Inc. in Coconut Grove, Fla., who for years sold annuities for an insurance company.
Annuities can be a solution as long as advisers aren’t getting paid to push the product, said Karen Remmele, a senior analyst with Cerulli.
“The products would have to be restructured. If providers want this, they’ll have to compensate the adviser adequately,” she said. “One of the problems with fee-based [advisers] is, you’re not seeing many annuities, because they’re commission based.”
Right now, Genworth has six large-plan sponsors — each with about $500 million in assets — that offer its ClearCourse product, said Brian Birmingham, vice president of Genworth.
He thinks that it is helpful to have advisers at workplaces, but advisers who work with Genworth don’t receive additional compensation if participants choose ClearCourse, Mr. Birmingham said.
“It’s better if we can set it up so those advisers … will receive the same [pay] no matter what the participant selects,” he said.
Participants pay an extra 0.85 percentage points for the cost of insurance to ensure the guaranteed lifetime income, Mr. Birmingham said.
Good advisers focus on the client’s problem no matter what compensation they may or may not receive, said Tom Foster, a spokesman for corporate retirement plans at The Hartford.
“I think advisers who make it known upfront and say, ‘I’m here to help you solve your problems and not sell you product,’ can be very successful,” he said.
But there is still concern that advisers will make high-pressure sales pitches, said Trisha Brambley, president and adviser with Resources for Retirement of Newtown, Pa.
“The thought of it makes me a little nervous,” she said. “These are high-commissioned product sales. Whenever you have that, you have to be hugely careful.”
