Products January 25, 2024

Fidelity Goes National With 401(k)-to-Income Annuity Offering

Fidelity’s Guaranteed Income Direct gives participants the option of converting some or all of their retirement savings into a monthly payout.

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Fidelity Investments has added another option for an annuity-driven “pension-like” paycheck from defined contribution retirement plans, according to a Thursday announcement.

Fidelity’s Guaranteed Income Direct, now available to plan sponsors nationally after it was initially presented by the firm in 2021, gives participants an option to convert 401(k), 403(b) or 457(b) savings into an immediate income annuity that will produce a steady paycheck in retirement—solving for the oft-discussed decumulation problem among employer plan participants and American savers.

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The offering gives participants the choice of purchasing an income annuity directly through an employer’s plan benefit from a third-party insurer selected by the employer, according to an emailed response from Keri Dogan, Fidelity’s senior vice president of financial wellness and retirement income solutions. Those assets leave the retirement plan and go to the insurer for purchase, with monthly cash flow views available through the benefits platform, NetBenefits.

“This process benefits the participant by avoiding any possible portability issues,” Dogan explains, noting also that “the participant can view information on the third-party insurers selected by their employer in order to make an informed decision on their purchase.”

Plan sponsors will not have a charge associated with adding the services, though fees may be charged for amending plan documents to allow for an annuity as a distribution option. The platform currently includes annuity options from Pacific Life, Prudential Financial and Western & Southern Financial Group, with more to be added in the future, according to the announcement. Fidelity partnered with Micruity Inc., a clearinghouse for annuity-related data, to create the digital platform.

“A key challenge for workers as they transition from saving for retirement to living in retirement is ensuring that they have enough predictable income to cover essential expenses,” Dogan said. “A guaranteed income solution may be a way to address those expenses, especially if Social Security and/or a participant’s pension will not provide enough guaranteed income in retirement to cover all essential expenses.”

Growing Market

Fidelity’s solution enters an evolving marketplace for the use of annuities as a pension-like solve for America’s 401(k)-dominant retirement system. This year, automakers General Motors and Stellantis announced that United Auto Workers’ members would have access to Hueler Income Solutions, an online platform offering annuity options, as opposed to a company-sponsored defined benefit plan. The Hueler solution had already been available for executives at the companies.

Nuveen, the investment management arm of TIAA, last year announced a target-date fund with a deferred fixed annuity option for use in investment menus, which followed an announcement from State Street Global Advisors and Annexus Retirement Solutions that they were partnering on a TDF series that includes an annuity. Other options have been on the market for years, including products from providers such as AllianceBernstein and IncomeAmerica, as well as from other recordkeepers in partnership with insurance providers.

Meanwhile, higher interest rates and consumer demand drove the sale of retail annuities to their second consecutive annual record in 2023, according to a January 24 release from insurance industry association LIMRA. The association, which tracks 83% of the total U.S. annuity market, said fixed annuities drove the growth with $385 billion in sales in 2023, 23% higher than the 2022 record.

Income annuities also had a “spectacular year,” according to LIMRA, with single premium immediate annuity sales hitting $3.5 billion in the fourth quarter, 9% higher than the same period in 2022; deferred income annuity sales were $1.3 billion in Q4, up 81% from the same period in 2022.

But even as retail sales soar, annuities are part of an ongoing debate regarding the fiduciary guidelines for recommending and selling them to consumers. The Department of Labor and the administration of President Joe Biden received many rebuttals to their retirement security rule proposal announced in October. The administration’s approach, otherwise known as the fiduciary proposal, would create stricter regulatory requirements for retirement-related financial advisement, including the often commission-based sales of annuities.

One Option Among Many

Fidelity noted that the new offering is just one part of a portfolio of products and solutions for plan sponsors to help employees transition from saving into retirement. The recordkeeper and asset manager noted other retirement income solutions available to employers for implementation, including flexible withdrawal programs and managed accounts.

“Fidelity also offers managed accounts, TDFs and other retirement investment vehicles, but by providing yet another option, Fidelity can offer a holistic range of solutions that can help people feel more secure that they will have enough income to last throughout their retirement years,” Dogan said.

The firm also cited some of its research showing that the number of retirees and pre-retirees deciding to keep their assets in plan past their retirement date has continually increased over the past 10 years, furthering the need for payout options. According to the firm, 65% of Fidelity participants expressed interest in having a guaranteed income option in their workplace plan, with 81% of its plan sponsors agreeing with the desire to provide such an option.

Compliance January 24, 2024

SECURE 2.0’s Auto Enrollment, Savers Match Will Bring Most Positive Impact

Research from EBRI forecasts the two features will do more for retirement savings than other provisions.

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Preliminary research from the Employee Benefit Research Institute says that the SECURE 2.0 Act of 2022 will bring modest benefits for those approaching retirement but will have a larger impact on younger workers. The report also found that the automatic enrollment and saver’s match provisions will have the largest positive effect on retirement security nationally.

The research findings were presented Tuesday by Craig Copeland, EBRI’s director of wealth benefits research, at the 2024 Retirement Symposium hosted by EBRI and the Milken Institute. The full research report is expected by mid-March.

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SECURE 2.0 requires all plans started after December 29, 2022 to automatically enroll their participants at a savings rate of between 3% and 10% of pay, unless they opt out or elect a different contribution, starting in 2025.

In 2027, savers with an income below $20,500 or $41,000 for married couples qualify for a 50% match to their individual retirement account or an eligible workplace plan from the federal government up to a maximum match of $1,000. The income thresholds will adjust for inflation beginning in 2027. The match is cut gradually until an individual has income of $35,500 or $71,000 for married couples to prevent a sudden loss of the match. The saver’s match replaces the saver’s credit.

EBRI’s research says these two provisions will likely have the most effect on retirement security for American workers, a key goal of SECURE 2.0. Copeland explains that these provisions are uniquely powerful at bringing more low-income people into the retirement system. The saver’s match “helps the most vulnerable group contribute more savings” by matching their contributions, and this match can be in addition to an employer match.

Copeland adds that low-income workers are “far more likely to participate with automatic enrollment.”

Younger vs. Older

EBRI’s research also shows that SECURE 2.0 will have much greater impact on today’s younger workers. Copeland explains that this is because the benefits of the legislation will need time to compound, and younger workers have time on their side.

In addition, the automatic enrollment provision does not apply to plans that existed at the time SECURE 2.0 was passed, which means this powerful provision does not apply to most plans that currently exist.

Over time, as new plans are launched, and as new firms and even new industries are created, this effect of plans grandfathered without auto features will decline in relative impact, Copeland explains, and many plans that were grandfathered in will voluntarily adopt automatic enrollment. Since this process will take time, it will naturally impact younger workers more.

EBRI finds that that workers between the ages of 35 to 39 who are projected to run out of money during retirement would decline by 4.7 percentage points as a consequence of SECURE 2.0, but workers between 55 and 59 would only see theirs decline by 0.1 percentage points.

Further, the average savings deficit for workers age 35 to 39 would decline by 14.4%, EBRI finds, but only 0.3% for those age 55 to 59.

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