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 should consider adding annuity products to their defined contribution (DC) plans, according to a paper published by the investment consulting division of Arlington, Va.-based Watson Wyatt Worldwide.
"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," reads the report, entitled "What if: Improving DC Retirement Options."
Genworth Financial of New York, The Hartford of Simsbury, Conn., Prudential of Newark, N.J., and MetLife of New York, in partnership with Merrill Lynch of New York, each have introduced so-called "in-service" annuity products. Still, adoption of the idea of buying income now for later has been slow to catch on, stymied by a steep learning curve for both participants and sponsors and by 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. (FRC) in Boston.
But once that awkward adjustment period is over, annuity offerings are poised to become a popular product, experts agreed.
"It takes a while for good ideas to sink in," said Noel Abkemeier, a consulting actuary and principal with Seattle-based 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 their lump-sum savings into income, the concept of the security annuities can offer is likely to catch on, said Brian Hersey a senior consultant with Watson Wyatt and author of the report.
"Having enough to live on and not outliving one's savings are primary concerns," Hersey said. After the accumulation phase, "the priorities [of plan participants] are much more toward the stability of income and not outliving those assets."
Only in the last five years have product manufacturers and vendors begun focusing in earnest on retirement income, Abkemeier said.
When introducing any product other than mutual funds into 401(k) plans, recordkeeping 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 themselves to daily valuation or partial shares.
"I think you will see the recordkeepers will have to change some," said Robin Credico, national director of the defined contribution practice at Watson Wyatt.
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 their lives. Shares are priced according to age and anticipated retirement date. The product addresses not only recordkeeping, 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 recordkeeping platform.
Genworth does not have its own platform, which means its sales force needs to talk not only to providers but to sponsors, Fleites said.
Once on the platform, the problem for participants becomes what to do in the event of a job change or termination. If the investor chooses to roll his or her savings into a rollover account, they face the risk that the rollover recordkeeper will not be able to support annuity products, Fleites said.
Recordkeepers, who are vying to attract all the assets a participant may have, recognize these challenges and are beginning to address them, experts agree.
Given the choice of re-vamping their existing systems by changing their interfaces, or partnering with insurance providers, most large recordkeepers are choosing the latter, Credico said.
It makes good sense when pitching plans to plan sponsors, too. "It's one-stop shopping. The recordkeeper says, We have everything to help you meet the needs of your participants,' and that's a great story," Abkemeier said.
With the distribution and recordkeeping challenges solved, annuity providers face obstacles surrounding education. "The whole idea of moving from an accumulation mentality to an income mentality is just coming around," Abkemeier said.
"There is more sensitivity that plan sponsors' responsibility goes beyond accumulation," Fleites said. "It's to take it to the next step and make sure they distribute it appropriately."
"We're in the early stages of the learning curve," Hersey said. Annuity providers must offer products that are simple to explain and institutionally priced in order for employers to sign on, Fleites said.
"From a conceptual standpoint, it's more compelling to have a suite of offerings to enable their employees to solve their financial needs," he said. Employees must hear about the security annuities can offer, whether variable or fixed, 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 mutual funds or other products, in hopes of a greater upside return, but without the fear of whether they can survive a market downturn, the report notes.
"It's a hiccup for recordkeepers, but if something is good for plan participants, it ends up being good practice," Abkemeier said.
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