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Data & Research August 27, 2024
In-Plan Annuity Providers Advised to Lean On ‘Pension Nostalgia’
A consumer focus group run by Hearts & Wallets found increased interest for in-plan retirement income annuities—though often for ‘someone else.’
Reported by Alex Ortolani
Responses from a select group of retirement plan participants show that in-retirement-plan annuity options may be gaining favor, with providers potentially finding traction by leaning into “pension nostalgia,” according to research released Tuesday by Hearts & Wallets LLC.
Results of focus groups with 70 retirement plan participants ages 45 through 74 held in Dallas, New York and San Francisco found a generally positive response to adding annuities to employer-sponsored retirement plans to disperse guaranteed amounts of retirement payments. Though many in the groups felt the product would be better for younger, “less disciplined investors,” rather than themselves.
Hearts & Wallets compiles data and market intelligence on saving, investing and financial advice via three proprietary databases, including consumer sentiment and attitudes. The research on in-plan income is the first installment of six reports exploring innovations in investment solutions and customer experience that will also include alternative investments and reactions to artificial intelligence.
Responses by the focus groups showed an increased receptivity to in-plan retirement income, as compared with prior surveys conducted the past decade, according to Laura Varas, CEO and founder of Hearts & Wallets.
“This concept test examines a new execution of an old idea,” wrote Varas in the report. “Pensions are on the decline, more households anticipate personal asset withdrawals as they age, and there is growing receptivity to leave defined contribution funds in plan.”
There are a number of in-plan annuity options, including via target-date funds, that have come to the market in recent years, with J.P. Morgan Asset Management announcing it has entered the market earlier this month.
One theme that played well with the groups was focusing on providing savers with a “pension-like” experience, as defined benefit plans have grown less common, and the 401(k) has become the prominent employer-sponsored savings program.
The consumer groups noted pensions “with fondness,” and some noted a regular paycheck provided via an employer as “good for society,” according to the researchers. Participants also noted the products may be good for “less savvy” investors who would get an annuity through an employer and not from a financial institution selling to them.
One of the participants, identified as a woman in San Francisco, said: “It is terrifying to think about young people without any kind of pension income, and just the fact that it’s available through the employer-sponsored retirement plans, it just makes it really easy.”
While TDFs, the most popular in-plan savings vehicle, are seen as the best solution for implementing a retirement income option, some in the group expressed concern over limiting investment returns with that option.
“As far as target-date funds right now, my retirement has that already, and the return is really bad compared to all my other funds,” said a respondent also identified as a woman in San Francisco, though different from the respondent noted above.
Hearts & Wallets recommended that firms may want to consider offering the option through a target-risk fund to avoid association with the concerns consumers have about TDFs.
“In-Plan Retirement Income Solution: Consumer Reactions to the Latest Trends in Guaranteed Income Design to Inform Product Enhancements and Reduce Barriers to Adoption” examined a TDF that adds lifetime income as an asset class starting at age 55, reaching a maximum allocation of 30%, with the option to convert the annuity portion into lifetime income at retirement. The groups included those with sole or shared investment decision responsibility with a minimum of $500,000 in investable assets, not including their primary residence.
