In-Plan Annuity Offerings Gain Steam With Recordkeepers

Recordkeepers and annuity providers are getting closer to an in-plan retirement income solution that can be part of a default option for participants, according to industry players engaged in the offerings.

Multiple annuity providers have created retirement income products that can offer participants access to a guaranteed paycheck in retirement. Issues of regulation, portability and basic plan sponsor and participant acceptance have all been roadblocks. But the No. 1 challenge, according to Nuveen’s Head of Retirement Investing Brendan McCarthy, has been the lack of seamless in-plan annuity offerings by major plan providers.

“Recordkeepers were set up to offer mutual funds and collective investment trusts,” McCarthy says. “Most 401(k) recordkeepers were not set up to offer third-party annuities.”

In order to offer annuity offerings within a plan, recordkeepers must create systems in which data can go back and forth with an annuity provider on a daily basis, McCarthy says. That is not only expensive, but a bandwidth challenge, considering the flood of new in-plan annuity offerings that have come to market from companies including Nuveen, which is owned by TIAA.

“You are throwing something on the recordkeeper that is a big build,” McCarthy says. “Add the pandemic to that [just after in-plan annuities had been approved by the first SECURE ACT], and that’s a lot to put on the recordkeepers.”

The time for partnership, however, is drawing closer, according to McCarthy. He says his firm has been in talks with recordkeepers about making a default option either through a managed account—which provides participants with a more expensive, but personalized advice offering—or a target-date fund that would automatically put savings toward an annuity.

“I expect that in 2023, you will see some recordkeepers starting to announce that they are adding a third-party lifetime income solution to their platform,” McCarthy says. “These products will start to become available in 2024 and into 2025—where the top recordkeepers will be offering the top solutions to their plan sponsors and advisers.”

Tina Wilson, Empower’s chief product officer, says her firm has been in talks with “almost everyone that has an income solution in the market today.” The executive at the country’s second largest recordkeeper says her team has been studying the various options and innovations in the market.

“We are going through a selection process to pick key partners,” Wilson said after giving a presentation on retirement income at last week’s National Association of Plan Advisors conference. “We will have multiple solutions available. … What we want is diversity. We want to have different approaches, because we want to give both advisers and plan sponsors choice.”

Wilson said Empower is looking to offer an in-plan annuity as a default through its managed account offering. Participants would be able to opt out, but those that take the default will get a personalized plan for a retirement income option. The offering could be built into the firm’s Dynamic Retirement Manager, a qualified default investment alternative launched in 2017 that directs employees’ retirement deferrals first into a TDF and later into a managed account, Wilson says.

Educated Decision

The retirement industry has long been engaged in an effort to educate about the potential for annuities to help solve retirement decumulation in a guaranteed, sustainable way. Most recently, the Insured Retirement Institute launched a Retirement Saving and Income Handbook for financial professionals. The handbook has descriptions of annuity and non-annuity products commonly available to investors and visual representations of how each functions.

Meanwhile, retirement industry data provider Fi360, owned by Broadridge, has created a program for advisers to consider, compare and learn about in-plan annuities. Fi360 has also spearheaded a retirement income consortium to gather annuity providers including Allianz, Nationwide, TIAA-Nuveen and data benchmarking and analytic firms.

Teresa Hassara, head of workplace savings and retirement solutions at Principal, notes that the recordkeeper has had an in-plan annuity option since 2015 called Principal Pension Builder. That product allows participants to transfer part of their retirement plan account balance to purchase guaranteed income or direct a portion of their plan contributions toward such a purchase.

While speaking on the sidelines of the NAPA conference, Hassara said she believes the in-plan annuity landscape has advanced since that initial offering, and broader uptake is on the horizon. “I think we’ve developed capabilities that we didn’t have 10 or 15 years ago,” she says. “I expect to see that there will be more action on how we create income for retirees and how do we do it in-plan and out- of-plan.”

Empower’s Wilson says the research shows that people are interested in converting their assets into an income stream, but they don’t know how. She says the “alphabet soup” of acronyms and products associated with retirement income must be simplified for plan sponsors and participants to get warm to the offerings.

“There is a mathematical equation here that is optimal when it comes to income, and 98% of the time, behavior will stop it,” Wilson said during her workshop presentation. “As we move forward, what we’re trying to really marry is what is optimal from a math perspective, and what is behaviorally going to be adopted, because if people don’t adopt it, it doesn’t matter how good the math is.”

Annuity To Go

Even if some recordkeepers more directly embed annuity income options, the portability of those offerings will remain a question for advisers and plan sponsors, according to experts. The SECURE 2.0 Act of 2022 tried to solve for that, says Wilson of Empower, in part by allowing for participants to port over an annuity into an individual retirement account.

McCarthy agrees portability is an issue but expects synergies to grow as more plan sponsors bring on annuitized products. He says it is an issue the industry will need to address in the coming months and years ahead.

The motivation to make the system work is not just from the retirement industry, according to McCarthy, but also from employers. He says retirement income is a huge opportunity for employers to not only recruit and retain employees, but to help them retire on time as well.

“The opportunity is massive right now for employers that they can provide their employees with pension-like guaranteed income through their 401(k) plan,” McCarthy says.

Wilson of Empower notes that, while retirement income is crucial to improve participant outcomes, it may not be the best solution for everyone. She believes annuity offerings must come with personalized and holistic financial advice.

“We have the technology today to make this a highly personalized engagement,” Wilson says. “For some people, they will not need and won’t benefit from guaranteed income, so don’t put them into that product. But for some people, they will give up liquidity for that assurance.”