There’s increasing interest in employing annuities in retirement plans, but plan sponsors need to review the products carefully.
A 401(k) retirement-savings plan doesn’t guarantee the availability of funding through the entire life of the account owner. Outcomes depend mainly on:
- The amount of funding available.
- The longevity of the account owner.
- Market conditions and investment performance.
There’s another factor in the shape of an annuity designed to provide a fixed stream of income for life. But the strength of the stock market through most of the past 40 years, subdued price inflation until very recently, a general sense that annuities were overpriced and regulatory hesitation have conspired to put that solution on ice. That is, until recently — and we’ll get to that vital point in a moment.
SO MANY QUESTIONS
Savers understand that the value of assets can drop, and stay down for decades. It took the S&P 500 about 25 years to recover from the Crash of 1929. Another trough marred absolute performance from the early 1970s through the mid-1990s, despite a surge in relative performance that began in 1982. Indeed, the setbacks the stock market has encountered since then — the crash of ‘87, the dot-com downturn, and the Great Recession of ‘08 — now look less like hard stops than temporary setbacks. But uncertainty always hurts, especially when, as now, stocks are down, and bond yields flirt with historic lows despite the recent (and unsettling) emergence of general price inflation.
Between feeling one’s finances aren’t ready for retirement and taking remedial action before it’s too late stand a clutch of unanswerable queries:
- When will the stock market bounce back?
- When will inflation stop eroding value?
- Are we heading into a global recession?
- Even if we bounce off a downturn once again, will we have to endure slow growth for years to come?
The pain these questions conjure for retirement savers comes less from each in isolation than from their aggregate impact on savers’ ability to make plans. Plainly, it’s hard to set personal finance goals when the value of money is softening, bond yields are in question and stocks look tired. And there are no easy answers, no quick fixes. Modern portfolio theory suggests ditching stocks for cash can do more harm than good. By the same token, eliminating bonds altogether could deprive savers of a cushion with a low historic correlation to stocks.
No wonder 81% of retirement plan participants surveyed by the Retirement Income Institute late in 2021 were interested in a guaranteed income option for their retirement plans. Boiled down, they want a portion of their income savings to behave like their grandparents’ defined-benefit plans by providing a fixed monthly stipend as a basis for budgeting, longer-term retirement needs and legacy planning.
“Workers value knowing how much they can safely spend more than any other characteristic of a retirement savings plan,” according to the report. At the same time, retirement savers aren’t keen to go all-in on annuities. In aggregate, the Retirement Income Institute says plan members given a choice to allocate savings among stocks, bonds, and an income annuity would place 33.5% of their total savings in an income annuity — a proportion that skews a bit higher for older and lower-income plan participants. In plain terms, most retirement plan owners want growth from stocks that’s balanced by bonds and augmented by an income stream they can count on.
Fortunately, the SECURE Act of 2019 makes it easier to add annuity options to tax-deferred retirement plans. Pre-SECURE Act products that facilitate sustainable withdrawals have been around for ages, but it takes an insurance-linked annuity to guarantee such an outcome — and new provisions in the legislation have afforded safe harbor protections for plan sponsors that want to incorporate annuity options into their tax-deferred retirement plans.
DON’T TRY THIS AT HOME
While the product pipeline for SECURE Act-friendly annuities is a work in progress, insurers and asset managers are competing to get their wares to market. As always, the results are and will continue to be mixed. Maybe more to the point, no one product is ever suited to every circumstance.
As a firm that specializes in advising employers that sponsor qualified and nonqualified retirement plans, we recommend carefully reviewing retirement products. For annuities in particular, one should seek to:
- Align your risk tolerance with that of the investment product.
- Determine what kind of annuity — immediate or deferred — is called for.
- Ascertain expected returns and compare them to annual fees.
- Check and communicate the underlying insurance policy details.
Finally, seek a firm that has a role as a fiduciary since that means their conclusions are unbiased as they search for retirement plan products and configurations best suited to the needs of individual investors. In this way, employees feel more secure about their post-career lives, and plan sponsors have new incentives for attracting and retaining employees.
Amber Kendrick is vice president and retirement plan consultant with Shelton, Connecticutbased Procyon Partners, which specializes in advising employers that sponsor qualified and nonqualified retirement plans.