Despite the fact that the majority of 401k plan participants are interested in guaranteeing a portion of their retirement plan income, the advisors to the plan sponsors are not bringing up the topic of annuities. Nick Thornton of Benefits Pro recently wrote the article, “Advisors to 401(k) plans not recommending annuities,” to figure out wherein lies the disconnect. Annuities are one of the only ways to guarantee a lifetime stream of income from 401k plan retirement savings. Unfortunately, there is a lot of misunderstanding about some of their complexities and it is forcing people away from annuities altogether.
LIMRA SRI surveyed advisors to 401k plan sponsors and found that only 10% of them recommendeded an in-plan annuity for participants in the past two years. Just under half of these advisors thought that adding a guaranteed income product to the plan option might be important. When it came to mega-advisors, who have more than $500 million of assets under management, 83% of them were interested in recommending guaranteed income products in the plan. But in reality, only around 25% of them actually do recommend annuities in the 401k plans.
There are a few theories as to why more advisors aren’t offering annuities as a plan option. LIMRA analysts speculated that it will take more time for advisors to adapt to recently changed regulations, such as making it easier to use QLACs in retirement planning. Many products are new and are viewed as complicated and hard to explain to consumers. While they can be hard to understand, it’s a worthwhile task to educate consumers on the importance of guaranteeing lifetime income with an annuity product. 401k plan sponsors are also partly to blame for the lack of annuity inclusion. Only 1/3 of sponsors offer in-plan annuity options right now even though 2/3 of them say that they know annuity income options are important. Employers need more education to realize the true value that annuities bring as an income option. They also need to understand that many employees already want these options and others just need education about the value and importance of an income option in their retirement plan.
The annuity industry needs to focus on the disconnect between the number of plan participants who are interested in having an income source option and the sponsors and advisors who are not including that option in the plans. When surveyed, 80% of plan participants said that they were very interested in an income option within their plan. Many government regulators have been focusing on the need for a guaranteed income source in retirement plans over the past few years. The DOL clarified the safe harbor law last summer so that plan providers don’t have to worry about fiduciary responsibility years in the future if something were to happen to the annuity company. Sponsors also no longer have to review their in plan annuities each time that a 401k plan member moves their money into an annuity. The clarification of the fiduciary guidelines should entice more sponsors to offer in plan annuities.
Unfortunately, the new DOL fiduciary guidelines might hinder the use of variable or indexed annuities in 401k plans though because they have to meet the BICE requirements. Immediate and fixed annuities do not fall under these requirements though, so there is no change in their status. The industry is hopeful that more advisors and 401k annuity plan sponsors will become educated on the importance of in-plan annuity income options to bring value to their employees.
Written by Rachel Summit