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

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.

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.