Bear Markets Offer Annuity Education Opportunity

Investors hoping for a reprieve from the significant negative market volatility experienced by the S&P 500 and the Dow Jones Industrial Average indices in recent weeks have been disappointed by another streak of sharp losses on Wall Street.

The approximately 20% overall drop experienced so far by the U.S. markets is causing significant pain and worry for retirement plan investors—particularly those in the “retirement red zone.” But as Barbara Delaney, principal at StoneStreet Renaissance LLC, points out, there is at least one small silver lining.

“One thing that you can say positively about a bear market is that it creates a reality check for everyone, particularly when you have so many people approaching retirement and so many assets in target-date funds [TDFs],” Delaney says. “Comparing this down market with the Great Recession, we still see that the bond markets are behaving more or less as they should, which is a consolation compared with what happened in 2008. But the losses are obviously making people think—how can I protect myself and do I really feel comfortable without any income guarantees?”

Delaney feels this particular bout of negative market volatility, coming as it does on the heels of the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, presents an important learning opportunity about the role of annuities. For context, the law includes among its many retirement-focused provisions multiple elements designed to increase the use of annuities in workplace retirement plans, such as an annuity selection safe harbor for plan sponsors and a requirement for annuity products to be made more “portable.”

“Clearly, people in our industry are starting to realize how much 401(k) plan participants need guarantees as they are approaching retirement or are already in retirement,” Delaney says. “We have an opportunity as advisers and plan sponsors to educate people about the institutional annuity landscape and to have a very important conversation about risk tolerance and guaranteed income.”

Delaney says that when annuities are explained in terms of maximizing income and driving happiness and confidence, people respond well. She also notes that the institutional annuity product set has expanded meaningfully in recent years—and many products now include the types of early death cash refund provisions that many annuity-skeptic investors say they want.

A recent BlackRock report underscores the need for annuity education in the defined contribution (DC) plan industry, pointing to various areas where participants’ annuity knowledge is lacking. On the one hand, the survey data tends to show that participants are interested in “guaranteed income solutions,” but at the same time, people commonly voice negative views of “annuities.” As such, even when progressive plan sponsors have made high quality, institutionally priced annuity products available in their plans, there has been quite modest uptake.

When they do choose guaranteed income, the surveys suggest that investors are more satisfied than those who try to manage retirement spending on their own, the BlackRock report says. Similarly, an older MetLife study found that nearly every traditional pension plan participant surveyed who took monthly income payments instead of a lump sum payment was happy with their choice. The same study found nearly one-third who took a lump sum regretted their first-year spending habits.