Optimism for guaranteed income succumbs to caution

Defined contribution executives keep finding reasons — or perhaps excuses — to eschew offering annuities and other lifetime income products in their retirement plans.

Twelve months ago, lifetime income product providers expressed hope that 2022 would be the year when "if-we-build-it-they-will-come" would take hold.

They were encouraged by regulatory relief reducing sponsors' liability risk and the development of new products to allay sponsors' concerns of an inadequate safe harbor and a paucity of guaranteed income choices.

Entering 2023, however, other issues took center stage as impediments to adoption — ranging from sponsors' worries about possible litigation to questions about participants' interest, to concerns about record keepers' willingness or ability to support such products on their platforms.

These issues were always on the minds of sponsors.

"Plan sponsors are a cautious group," said Nevin Adams, chief content officer for the American Retirement Association, Arlington, Va. "Participants are not really asking for this."

The pandemic thwarted momentum for adopting in-plan guaranteed income options as participants were most concerned about maintaining their health and keeping their jobs; meanwhile sponsors focused on more immediate benefits priorities, Mr. Adams said.

"We are still in the infancy of creating a solution," said John Doyle, the New York-based senior vice president and senior retirement strategist for Capital Group's American Funds.

Mr. Doyle cited portability problems as a major turnoff for sponsors and participants. If company X offers an in-plan product with record keeper Y, what happens when an employee moves to company A whose record keeper B doesn't accept guaranteed income products? And what happens if company X wants to change record keepers?

"It will take time to achieve open architecture portability" for guaranteed income products, Mr. Doyle said. Otherwise, sponsors feel locked into a specific record keeper.

"There's a lot of skepticism about the portability issue," Mr. Adams said. "Sponsors don't want to be limited" in their choice of record keepers.

One organization under the ARA umbrella, the Plan Sponsor Council of America, in December issued an annual survey of 401(k) and profit-sharing plans that showed modest interest in guaranteed income products.

Among the 557 plans surveyed, 9.3% said they offered an in-plan annuity, with the greatest interest (12.5%) among plans with 1,000 to 4,999 participants. The survey covered the 2021 plan year, according to the latest available information.

When sponsors were asked what plan changes they made in 2021, fewer than 1% said they added an in-plan annuity.

Asked what changes they would make in 2022, only 1.4% said they would add an in-plan annuity. The PSCA survey results are similar to several other surveys published in 2022.

An annual Callan LLC survey, published in February, reported that 2% of 101 respondents offered a target-date series with an in-plan annuity in 2020, but none offered it in 2021 and none planned to do so in 2022. The survey said 2% offered an in-plan guaranteed minimum withdrawal benefit product in 2020, but none offered it in 2021 and none planned to do so in 2022.

An annual survey published by Pacific Investment Management Co. LLC, Newport Beach, Calif., of 26 DC consultants whose clients have $5.7 trillion in assets under administration, found that 4% of clients offered an in-plan guaranteed income product and 9% were planning to do so. However, the survey covering the 2021 plan year found that 48% aren't considering such action and 39% were not interested.

A companion PIMCO survey focusing on smaller DC plans, also published in May, found that 10% offered an in-plan product and 10% were planning to do so. Half said they weren't considering such products and 30% had no interest. This survey was based on responses from 10 aggregators — defining them as independent DC-focused advisory firms with shared resources — whose clients had $1.2 trillion in DC assets under administration.

Despite the regulatory safe harbor, a survey published this month by Alight Solutions, Lincolnshire, Ill., found that employers remain squeamish about potential liability related to offering in-plan annuities. Forty-seven percent of respondents cited fiduciary concerns as the major reason for not offering in-plan annuities, according to the survey of 90 employers with more than 3 million employees. Other major impediments were difficulty with participant communication (44%) and wanting to see more products (44%). Multiple responses were allowed for the survey conducted in the fall of 2022.

The Alight survey also reported that 51% of employers weren't interested in offering in-plan annuities, while 35% were moderately interested. Only 3% were very interested. Twelve percent already offer this feature.

Sponsors must act deliberately, said Mr. Doyle, when assessing the mechanics of a retirement income product and taking the temperature of the participants. For example, does a retirement plan make the retirement income option part of the qualified default investment alternative? Should participants be required to opt out? Or allowed to opt in?

"Many participants don't want a guaranteed product that is more expensive," he said. "Sponsors don't want participants paying for something they won't use."

At the P&I Defined Contribution West conference in San Diego in October, Mr. Doyle presented a theoretical plan for creating a retirement income option. It required three years from idea to implementation.

The steps include making arrangements with a record keeper, developing participant demographics, analyzing plan benefits as well as Social Security, conducting a manager search for a pay-down strategy, establishing an annuity platform, launching the product, monitoring effectiveness and re-evaluating the need for a guaranteed option.

"It's not going to happen overnight," he told the attendees, adding that retirement income options can be put in place incrementally and don't have to be guaranteed income products.

Sponsor caution was also flagged in an October 2022 report by Cerulli Associates, Boston, noting although the addition of new products is a "step in the right direction," the research firm wrote "there is plenty of room for innovation."

The firm predicts the next advance from retirement income providers will focus on personalized, advice-based products, necessitating greater cooperation from record keepers to integrate such options on their platforms.

A year ago, when P&I interviewed consultant Michael J. Francis about guaranteed retirement income products, he expressed skepticism about how willing sponsors would be to offer them. He hasn't changed his mind, and none of his clients offer in-plan retirement income products.

Sponsors are still skittish about risks that an insurer of a guaranteed income product goes bust — even though some new products feature coverage by multiple insurers and the 2019 SECURE Act provided a fiduciary safe harbor for sponsors if an annuity provider didn't deliver on its promises.

"That continues to be an issue for sponsors to get over the perceived risk of too many eggs in one basket," said Mr. Francis, president of Francis Investment Counsel LLC, Brookfield, Wis.

Some of his clients offer a service from a third party that allows participants to choose from several annuity options; it identifies quotes, credit ratings and product features. The participant can purchase the annuity outside of the employer, which isn't a fiduciary in this arrangement.

Portability remains a big issue for Mr. Francis' clients, and he advocates greater cooperation among record keepers to expand the transferring of guaranteed income accounts within the retirement system.

"We need continued cooperation and improved cooperation by the insurance industry to make this attractive," he said. Portability and the need for multiple insurers supporting specific products require the most cooperation, he said.

Mr. Francis and other interviewees said the insurance industry must improve its education efforts to sponsors, advisers, consultants and participants.

"There needs to be a strong incentive for employers" to offer retirement income products, said Shawn O'Brien, associate director of U.S. research for Cerulli Associates. "Incentive" to Mr. O'Brien means such products must be marketed as "taking care of employees," in a sense, like a DB plan.

"Employers want to be perceived as taking care of their employees," he said. "That could attract employees."

Because more sponsors are actively encouraging retirees to keep assets in their DC plans — or at least preferring that retiree assets stay in the plan — sponsors should be further motivated to offer retirement income products, he said.