Annuities are rising in popularity in retirement plans, offering lifetime income solutions. Despite challenges like a lack of understanding, experts see growing demand. Employers and plan sponsors are key to making annuities accessible and cost-efficient for workers.
Congress originally passed the SECURE Act in 2020, with former President Joe Biden signing the SECURE Act 2.0 into law in 2022. This made it easier for employees to contribute to company retirement plans. It also made it easier for workers to access annuities in their 401(k), 403(b) and 457 plans.
Three years later, annuities are becoming more popular and pervasive in employer retirement plans.
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According to a recent study by TIAA, 76% of defined contribution plan sponsors expect demand for annuities will grow significantly by 2030, “similar to how target-date portfolios took off once policymakers paved the way for them to be the default.” The study noted approximately 40% of plan sponsors who don’t already provide an annuity option say they plan to do so by 2027.
That rising demand is going to require some professional help.
“As pension plans began to wane, employers and policymakers were focused on getting people to save through defined contribution plans,” said Kourtney Gibson, CEO of TIAA Retirement Solutions. “Now, with growing uncertainty around Social Security and people living longer lives, we need to help people manage their savings to last through retirement. Our research indicates that plan sponsors are open to offering lifetime income but need support to add it to their plans – and consultants have a huge role to play in delivering that help.”
Part of the problem in assimilating annuities in retirement plans is what TIAA calls “annuity fluency,” as the engagement of defined contribution plans and annuities “may be slowed” by lack of institutional knowledge of how annuities work.
According to the study, just 37% of plan sponsors say they can “articulate the value and importance of annuities.” The top two challenges for companies looking to add annuities to the retirement plan menu are a lack of understanding among decision-makers (39%) and complexity (39%).
A Balancing Act
The rise of annuities in employer retirement plans is no shocker – not when 86% of Americans are concerned about having enough income in retirement, and 80% are worried about outliving their savings.
Annuities can help plan sponsors, too.
“For plan sponsors, in-plan income solutions offer the ability to attract and retain employees by helping participants protect their hard-earned nest egg and generate income in retirement, which can help support employees to retire on time,” said Matt Condos, senior vice president of product solutions, retirement plan services at Lincoln Financial. “A higher number of on-time retirements helps employers avoid medical costs incurred by an aging employee base and can encourage healthy turnover and promote growth opportunities for other talent in the workforce”
Condos said his company has seen employers not only adopt in-plan income solutions to their plan for participants to select, but some have also made in-plan income solutions their Qualified Default Investment Alternative (QDIA), which defaults participants into the plan offering.
“In-plan income solutions can help employees retire confidently and lessen their fears about outliving their savings,” he said. “What sets in-plan income apart from individual annuities is that they are institutionally designed and priced, providing a more simplified and cost-efficient benefit, made available through their employer’s retirement plan.”
While individual annuities are widely available and often provide a more customized solution, Condos said participants with an in-plan income option can benefit from the usually less expensive and simplified solution.
“This is especially beneficial for employees who may not have accumulated wealth to the level in which they would seek out a financial advisor, or employees who prefer to work within their employer-sponsored plan or may not have savings outside of the plan,” he noted.
So, what should workers know about the annuities in their retirement plan?
Why Annuities?
The paradigm shift from pensions to individual retirement plans has caused concern for modern-day workers.
“With market volatility, low interest rates at banks, fluctuating inflation rates and Social Security uncertainty, companies are looking to annuities to attract employees,” said Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan. “Annuities offer safety and stability and also give you the option of a lifetime income and knowing where your guaranteed income comes from will help map out your retirement.”
Portfolio Balance
Investment experts say a retirement plan should not consist of a majority in annuities. “You still need assets in securities to capture market gains,” Rubio noted. “Annuities are set up for more safety and possible lifetime income, not market gains.”
Lean on Your Employer
Companies can help workers optimize their retirement plan annuity experience by getting the details right.
“If a plan sponsor or advisor is considering adding or seeking to add an annuity element to their retirement plan, the foundation for success lies in a well-documented process for evaluating annuity options and ensuring they fulfill their fiduciary requirements,” Condos said. “It’s also important to ensure they have the insurer representation as described in the SECURE Act.”
These steps set their plan and participants up for success “when evaluating their own retirement needs and the benefits of in-plan income solutions for their personal circumstances,” Condos added.
Editor Norah Layne contributed to this article.