Comparing Retirement Income Solutions

Advisers can get stumped when selecting the best type of guaranteed income solution for clients, but it can help to break down the offerings into two main categories: guaranteed withdrawal benefits and immediate annuities, according to Glenn Dial, senior retirement strategist at American Century Investments.

“There’s really only two major types of insurance categories,” Dial said on Thursday during a Broadridge Financial Solutions-hosted webinar, “How to Compare Retirement Income Solutions.”

Dial went on to break down the differences between GWB annuities and immediate annuities, with the key distinction being about how much control an owner has over the product as measured against the amount of payout.

Retail annuity sales are booming, according to LIMRA, which found that annualized premium for workplace life insurance, disability insurance and supplemental health products has shown strong increases over the year. Meanwhile plan advisers and plan sponsors are considering how to best offer them to participants via the plans.

Guaranteed Withdrawal Benefits

“With one group of insurance [GWBs], you’ll hear these terms: explicit insurance fees, revocable and participant ownership. They all mean about the same thing,” Dial explained.

Most of the GWB insurance products that have explicit fees, or are revocable, continue to be owned by the participant even during the distribution phase, he said. While there are exceptions, GWB-type contracts will provide full market participation as well as full liquidity, both pre- and post-retirement.

“You’re not losing control from a liquidity standpoint or from a market participation standpoint,” said Dial. “If you want your cake and want to eat it too, generally speaking, your payout, especially at age 65, would be less than what you would get in what we call an immediate annuity or herd annuity type products.”

Immediate Annuities

Dial said to think about products such as immediate annuities and term annuities as stable value investments, where the fees are typically implicit. Depending on the provider, these products usually include some type of restriction, whether that be an irrevocable stipulation or limitations on when one can sell. In return for giving up some of the control, buyers receive a higher guarantee immediately after entering retirement.

Immediate annuities offer guaranteed income for life, providing financial security and stability, especially for retirees, according to SmartAsset. They shield against market fluctuations and outliving savings. However, the trade-off is the loss of control over the lump sum invested, as funds are converted into fixed payments, potentially limiting liquidity. Additionally, inflation can erode the purchasing power of fixed payments over time. Depending on the individual’s health and longevity, they may not receive the full value of their investment.

In-Plan Future

There is a place for both GWB and immediate annuity type products in the retirement income marketplace, according to Dial. He said in the future, plan sponsors will have both products on their platform, but they will want to start with one type, which is where advisers can come in and provide guidance.

“I think that’s what your job is, helping your client consider ‘Which will I start with?’ Is it going to be more the revocable side where the sponsor or participant wants more flexibility? Or is it someone who says this is about income, so I’ll give up flexibility and controls for even higher income right out the gate?”

He recommended considering  a client’s preferences in these categories because it will be useful when advisers have conversations with the sponsors.

“Once you know is it participant-owned or is it insurance-owned then you’re going to know the answer to about 80 or 90% of all the other questions that are going to come up about the product without having to know all the details,” said Dial.