RETIREMENT
Nuveen, TIAA’ s asset manager.“ Covid kind of sidetracked everything,” he says.“ Meanwhile, the need for retirement security only became greater as more people entered retirement.”
After the pandemic, technological hiccups further delayed wider adoption of embedded annuities, he says. For employers to add an annuity from an outside company, they need a sort of“ pipeline of information” to support the daily exchange of data that’ s necessary between the employer’ s recordkeeper and the annuity provider, he says— data such as lifetime-income valuations and projections.“ For the most part, that technology has not existed,” he says.
Plan sponsors want to add annuities, he says. However, their recordkeepers have hesitated because there might be significant costs involved in adding the technology to their platforms.
Three Solutions Now Available McCarthy and others see glimmers of hope for wider adoption of in-plan annuities, however. Recently, three different types of solutions have become available to employers, according to Kim Plyler, a senior vice president at Jackson National in Franklin, Tenn.
The first solution positions annuities as an option alongside others in the plan menu. For instance, Fidelity’ s Guaranteed Income Direct platform allows employees to convert all or a portion of their 401( k) money into an immediate income annuity that provides guaranteed payments throughout retirement.
The second type, she says, enables employees to access annuities through a fund. She cites BlackRock’ s LifePath Paycheck plan, which offers target-date funds that primarily hold equities when an employee is young and automatically reallocate to fixed-income instruments as retirement nears. When the participant turns 55, though, the funds can begin to invest in annuities if the plan holder wishes. That allocation can grow to 30 % of the portfolio, with the other 70 % remaining in stocks, bonds or cash.
The third option uses annuities“ as an insurance overlay or wrap,” Plyler says. One example is AllianceBernstein’ s Secure Income Portfolio. This holds stocks and bonds in a variable annuity with a guaranteed lifetime withdrawal benefit rider to generate retirement income. The annuity is chosen through a competitive bidding process that weighs factors such as the insurer’ s financial strength, according to the AllianceBernstein website.
Plyler is confident that these three options are just the beginning.“ Competitive pressure will continue to grow on sponsors, consultants and recordkeepers to ensure their plans are keeping pace with broader industry utilization,” she says.
“ Competitive pressure will continue to grow on sponsors, and recordkeepers to ensure their plans are keeping pace with broader industry utilization.”
— Kim Plyler, Jackson
To be sure, many clients remain leery of annuities. Retirement experts think that wariness can be partly attributed to the clients’ misplaced focus on asset accumulation and investment gains rather than retirement income. Annuities might not have the sex appeal of big returns, but they have the unique ability to provide retirement protection that other investments can’ t.
“ As an industry, we have to do a better job of educating decision-makers,” says Matt Condos, a senior vice president for retirement plan services at Lincoln Financial in Radnor, Pa.“ Guaranteed sources of retirement income continue to grow in importance as each successive generation has a lower expectation of being able to rely on traditional sources, [ such as ] defined-benefit plans.”
Some employers, on the other hand, might be annuity-shy because they are leery of the sheer number and variety of annuity types.“ These products are not homogeneous, so it can be confusing,” says Tamiko Toland, an education fellow for the Alliance for Lifetime Income and
CEO of 401( k) Annuity Hub, a consulting firm in Santa Fe, N. M.“ Many people don’ t know where to start.”
But according to Frank O’ Connor, vice president of research at the Insured Retirement Institute in Washington, D. C., one way to streamline annuity inclusion is to make annuities the default choice for employees who don’ t choose something else.
“ Funds with an annuity component can be qualified default investment alternatives,” he says, referring to a mechanism for automatically selecting the default investment option for retirement plans, where participants’ contributions are invested if they don’ t make their own investment choices. QDIAs also provide fiduciary protection for plan sponsors.“ This certainly simplifies inclusion and promotes adoption,” he says.
High Fiduciary Standard Then there’ s the question of product quality. Nuveen’ s McCarthy says the annuities must meet the high fiduciary standards set by the Employee Retirement Income Security Act( ERISA), as all products offered in defined-contribution plans do. That means they must be carefully vetted and monitored, he says.
Moreover, he says, the annuities offered in retirement plans aren’ t the same as those available on the retail market. Inplan annuities are institutionally priced, and therefore cheaper. They do not have the high commissions that can make certain retail annuities extra pricey.
But there is one restriction that he wishes would be loosened or eliminated: The annuities in these plans must be liquid— or sellable— at all times. They can’ t have surrender periods, as many annuities do, that prohibit clients from selling them in the first years of ownership without penalty.
“ The retirement industry would be better served if we were able to make those less-liquid annuities available,” he says.“ Insurance companies offer a higher payout rate on annuities that can’ t be cashed for a period of time. So, in a sense, clients are paying the price for liquidity they might not need or want in their retirement savings.”
58 | FINANCIAL ADVISOR MAGAZINE | APRIL 2025 WWW. FA-MAG. COM