Know Your GLWBs: Assessing Annuity Vehicles as In-Plan Income Options

The U.S. Department of Labor’s Employee Benefits Security Administration guidance notes in its “Meeting Your Fiduciary Responsibilities” publication that the “duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments.” Furthermore, “Prudence focuses on the process for making fiduciary decisions.”

Plan advisers and defined contribution  plan sponsors are likely to have an established process for evaluating investments as candidates for a plan’s lineup. But the relative rarity of in-plan annuities that include a guaranteed lifetime withdrawal benefit, or GLWB, option makes it less likely that fiduciaries will have an evaluation process in place for those products. GLWBs’ complexity adds another challenge, because the products continue to evolve with new variations.

Fortunately, there are resources available online from the Institutional Retirement Income Council and from Morningstar Center for Retirement & Policy Studies to help develop a prudent evaluation process. Additionally, a recently launched consulting service is offering to help advisers and sponsors deal with in-plan annuities and insured lifetime income options.

A Preliminary Screen

Before deep-diving into insured in-plan options, it’s worthwhile for sponsors to consider if participants will benefit from an annuity; Morningstar’s research has found that annuities did not benefit all participants. Higher-wealth participants could “more or less self-insure against longevity risk,” and “annuities are also not that beneficial for participants for whom Social Security or an inflation-adjusted pension provides a high level of income relative to their expenses,” according to the Chicago-based financial services firm. For these participants, the “existing guaranteed income stream already provides protection against market risk and longevity risk.”

Also, GLWBs are not the only in-plan lifetime income options available, and they might not be the best solution for every situation. Morningstar’s September 2022 report, “The Retirement Plan Lifetime Income Strategies Assessment,” compared the performance of seven lifetime income strategies, including GLWBs, against four metrics using simulated plan participants’ lifetime retirement outcomes:

• Protection against market risk;
• Protection against longevity risk;
• Protection against high inflation; and
• Performance under favorable market conditions and shorter retirements.

GLWBs received a medium performance ranking for protection against longevity risk and high rankings for inflation protection and performance under favorable market conditions and shorter retirements. However, they earned a low ranking for protection against market risk, which is surprising, given insurers’ emphasis on that aspect of GLWBs’ benefits.

For plans that decide to review GLWBs, an IRIC website white paper, “Fiduciary Considerations for Insured Retirement Income Products: Focus on Guaranteed Withdrawal Benefits,” by Fred Reish and Bruce Ashton, attorneys with Faegre Drinker Biddle & Reath LLP and Alta Trust, respectively, is a good starting point. The authors focused on guaranteed minimum withdrawal benefits, GMWBs, which have a review process that also applies to GLWBs.

Reish and Ashton discuss six factors to consider:

• Insurer’s financial strength: Is it reasonable to believe the insurer will be able to make the future payments it guarantees?;
• Premium cost and other fees and expenses of the underlying investment option;
• Product features, generally;
• Portability for participant to another plan or IRA; and
• Product education provided by insurer for participants.

Getting Into Details

The IRIC provides several additional resources for in-depth comparisons and evaluations of retirement income options. The Selected DC Income Products and Services table, updated in August 2021, compares 17 lifetime income options, including four with GLWBs, across dozens of attributes. Although the table does not include the newest products, it is still an extensive and valuable due diligence template.

Another IRIC resource comes in product fact sheets for 14 specific income products. The NCIT American Funds Lifetime Income Builder Target-Date Series Fact Sheet, for instance, includes details on product description, distribution channels, income benefits, liquidity and education for participants. 

Working With the Data

A product’s specific details are essential for due diligence, but advisers should not rely solely on the numbers, says Martin Schmidt, principal of MAS Advisors in Chicago. He cites advisers’ and sponsors’ focus on fees as an example. Schmidt understands the need to consider fees, but he emphasizes other features, such as the benefit amount to be paid for a given fee and the participants’ control of their assets. Participant education is also important, because participants need to understand that they will reap a GLWB’s full benefit only if they stay with the product: “If you get out of the product, you lose all of your accrued benefits,” he says.

Wade Pfau, Dallas-based co-founder of RISA LLC and author of “Retirement Planning Guidebook,” agrees that simply comparing GLWBs’ fees is insufficient. A better approach is to determine how much guaranteed income the contract will provide for the fees it charges, starting with the worst-case scenario in which the participant earns only the guaranteed minimum. Also, there may be a trade-off between lower downside return guarantees and more upside potential, he adds.

Michelle Richter-Gordon, IRIC’s executive director, stresses that the evaluation process should not begin with the product and then be traced back to the needs of the plan.

“Are the needs of the plan to serve the near-retiree population, the already in-retirement population or the population that is saving towards an income?” she asks. The plan’s objectives and participant composition will “impact what types of solutions the adviser considers or plan sponsor considers.”

The IRIC’s product comparison worksheets illustrate the large number of details that go into a GLWB review. For advisers and sponsors who want to outsource that level of detail, Richter-Gordon and Mark Chamberlain, founder of the Open Architecture 2020 Group, recently launched a new registered investment adviser, Annuity Research & Consulting, to help advisers and sponsors get through the annuity selection process. The firm will charge hourly and project-based fees, and it can serve as fiduciaries in a 3(21) or 3(38) capacity or as a non-fiduciary resource.

GLWBs or GMWBs?

The GMWB and GLWB acronyms are sometimes used interchangeably, but their benefits differ. Both options provide a minimum level of income or withdrawal amounts, regardless of an account’s investment performance. A GLWB provides a guaranteed income for life, even if the participant’s account value is depleted. A GMWB guarantees a return of invested principal through annual withdrawals until the account’s invested amount is depleted.