Money Management Executive
Implementing automatic enrollment and auto-escalation in 401(k) plans is a start in the effort to push employees to prepare for retirement, but it may not be enough.
Participants also need help planning how to mete out their savings after they retire, and for that sponsors are considering how to add annuities to their defined contribution plans, according to a paper published by the investment consulting division of Watson Wyatt Worldwide of Arlington, Va.
"With more than 13 million baby boomers now between the ages of 57 and 60, many of them with only a DC plan, employers must figure out how to assist employees entering the retirement phase of their careers. Having access to a third investment choice in the form of life annuity options is the optimal solution," according to the report, titled "What If: Improving DC Retirement Options."
Genworth Financial of New York, Hartford Financial Services of Simsbury, Conn., Prudential Securities of Newark, N.J., and MetLife Inc. of New York, in partnership with Merrill Lynch & Co. Inc. of New York, have introduced "in-service" annuity products.
Still, the idea of buying income now for later has been slow to catch on, because of a steep learning curve for participants and sponsors and operational challenges for companies looking to bring competitive products to market.
"It's a new animal; it's going to take some time to get comfortable with it," said Luis Fleites, vice president and director of retirement markets at Financial Research Corp. of Boston.
But once that adjustment period is over, annuity offerings are poised to become popular, experts agreed.
"It takes a while for good ideas to sink in," said Noel Abkemeier, a consulting actuary and principal with the Seattle consulting firm Millman. "The awareness that we're in a contribution, not a … [defined benefit] era, is slowly sinking in, and the remedies will come slowly."
As the first generation of DC-dependent retirees begins to roll out of 401(k) and other qualified plans and looks to convert lump-sum savings into income, the concept that annuities can offer security is likely to take hold, said Brian Hersey a senior consultant with Watson Wyatt and the author of the "What If" report.
"Having enough to live on and not outliving one's savings are primary concerns," he said. After the accumulation phase, the priorities of plan participants "are much more toward the stability of income and not outliving assets."
Only in the last five years have product manufacturers and vendors begun focusing in earnest on retirement income, Mr. Abkemeier said.
When introducing any product other than mutual funds into 401(k) plans, record keeping always proves to be one of the biggest obstacles. Since mutual funds still dominate the defined contribution space, most platforms are built with mutual fund attributes in mind.
Annuities do not lend to daily valuation or partial shares.
"I think you will see the record keepers will have to change some," said Robin Credico, national director of Watson Wyatt's defined contribution practice. Companies at the forefront of the movement have found various solutions.
The Hartford's Lifetime Income product, for example, is essentially an annuity offering in a mutual fund package. Each share guarantees $10 of income per month from the retirement age an investor chooses for the remainder of his life. Shares are priced according to age and anticipated retirement date. The product addresses not only record keeping, but education — using a relatively simple concept to sell a pretty complex product.
MetLife partnered with Merrill Lynch to access distribution channels, and Prudential has its own record keeping platform.
Genworth does not have its own platform, which means its salespeople need to talk with providers and sponsors, Mr. Fleites said.
Once participants are on the platform, the problem for them becomes what to do in the event of a job change or termination. Investor choosing to roll their savings into a rollover account face the risk that the rollover record keeper will not be able to support annuity products, Mr. Fleites said.
Record keepers, who are vying to attract all the assets a participant may have, recognize these issues and are beginning to address them, experts said.
Given the choice of revamping their systems by changing their interfaces, or partnering with insurance providers, most large record keepers are choosing the latter, Ms. Credico said.
It makes good sense when pitching plans to plan sponsors, too. As Mr. Abkemeier put it: "It's one-stop shopping. The record keeper says, 'We have everything to help you meet the needs of your participants,' and that's a great story."
With the distribution and record keeping challenges solved, annuity providers face education obstacles. "The whole idea of moving from an accumulation mentality to an income mentality is just coming around," Mr. Abkemeier said.
Mr. Fleites said annuity providers must offer products that are simple and institutionally priced for employers to sign on.
"From a conceptual standpoint," he said, "it's more compelling to have a suite of offerings to enable their employees to solve their financial needs." Employees must hear about the security annuities can offer, he said.
The guarantees annuities offer can provide participants a sense of security, allowing them to allocate a portion of their savings to more volatile products in hopes of a greater upside return but without the fear of whether they can survive a market downturn, the Watson Wyatt report says.
