At-Retirement Annuities

Probably 75% of retiring 401(k) participants want to know about their retirement-income options, 401(k) Advisors’ Stace Hilbrant says.

And while most employers have yet to offer in-plan access to retirement-income products, some feel comfortable facilitating participants’ at-retirement access to annuities. These employers tend to share a similar philosophy, says Randy Bachman, vice president of product management at Principal Financial Group. “They feel it is part of their program—not only the savings phase but the payout phase,” he says. And participants benefit. “It is a very efficient way to conserve that lump sum at retirement. Their interest is in turning their account balance into a personal pension plan.”

Consider these five points for facilitating at-retirement access: 

1) Decide whether annuities make more sense outside of a plan or in it. Sponsors have fewer fiduciary worries about these products when offered at retirement, Hilbrant says, noting that sponsors can say, “Once you are an ex-participant in the 401(k), you are no longer my fiduciary responsibility.”

The No. 1 reason Bachman hears why employers prefer to enable at-retirement access versus in- their-plan is lessened fiduciary risk, because including the product within a plan invites Employee Retirement Income Security Act (ERISA) regulation. Principal’s at-retirement offering is “alongside the plan and built into the overall education,” he says, “[but] not technically offered as part of a plan.” Also, an offering outside the plan allows for customization to individuals’ needs, he says.

2) Understand specific products’ elements. Of the products favored for at-retirement choices, Bachman says, “The basic income annuity is the workhorse of the payout phase. It’s simple: It converts an account balance to an income stream. It’s also group-priced.”

Bachman cites some key considerations for helping sponsors decide whether to offer at-retirement access to a specific product:

• The insurer’s financial strength and stability;
• A provider’s education-level in this area: whether it integrates into formats including seminars, the call center and online;
• Payout-rate competitiveness—not just the current value but historically;
• The service provided in the upfront purchasing process and on an ongoing basis;
• Product features such as inflation protection or liquidity options; and
• Whether the provider offers the product alongside a broader educational effort to help participants with retirement-income issues.

“The key is looking at: Is this part of a larger, holistic effort? Or is this just about a single product?” Bachman says.

3) Think about facilitating retirement-income education. Some employers favor this route over helping retiring employees access specific products. White Oak Advisors has helped sponsors vet third-party education providers for this purpose. “They are not selling products of any type. They are saying, ‘Here are our options, and these are the types of questions to ask the insurer or agent,’” White Oak’s James Robison says. “The employer sees it as a win because employees are getting professional assistance.” But making that happen requires a sponsor willing to pay, he says, as well as finding the right third-party education provider.

4) Get the “participant-communication tone” right. CUNA Mutual Group finds that what motivates people to select an at-retirement annuity is a phone call to one of its licensed financial planners. “Our focus is on education and changing the mindset of the participant,” says Tom Eckert, vice president of retirement plan services. “Think of this as an account that will facilitate a monthly payout,” he says. Instead of focusing on someone’s total account balance, tell that person how much of a monthly payout he or she can afford in retirement, he suggests.

When participants seek help with retirement-income planning, Eckert says, CUNA does not offer advice but explains, “Here is the payout that you need. And here is the payout that you can afford.” It also discusses their options and minimizes the use of the word “annuity,” preferring, for example, “payout” instead.

5) Ponder how it meshes with your business goals. Facilitating access to these products at retirement “is a unique opportunity for advisers, because it adds a value proposition for them [in] the distribution phase,” Bachman says. He cites a 2011 survey by The Principal finding that 78% of advisers expect to spend more time on income planning in the next three years. Sponsors facilitating ­at-retirement access opens that door wider for advisers, he says. “Their value proposition is about helping sponsors understand these products. There is a lot of opportunity to educate them on it.”