LIMRA: Plan Advisers Will Play Key Role in Future of In-Plan Annuities

As of now, an estimated nine out of 10 defined contribution retirement plans do not offer participants an in-plan annuity option, according to LIMRA. That has been the case for years despite a push from insurance providers for in-plan options, but 2024 may finally be a “tipping point,” the insurance trade group wrote in its report.

According to the survey of 566 private sector plan sponsors with at least 10 full-time employees, about three in four sponsors will be making a decision about adding an in-plan option within the next 12 months.

“Paternalistic employers do not want their current and former employees to fend for themselves,” LIMRA’s researchers wrote in an executive summary of the report. “They would rather make certain decisions for their employees, on the grounds that it will be to their employees’ financial benefit in the long run.”

Earlier this month, Transamerica Corp. and payroll provider ADP Inc. separately announced annuity offerings to plan participants. Transamerica’s is a partnership with a State Street target-date-fund series that embeds the annuity into the glide path. ADP’s offering is through Hueler Companies’ Income Solutions, which offers participants a choice of institutionally-priced annuities.

LIMRA noted in the report that the definition of an in-plan annuity could be an annuity inside a target-date fund, an annuity that linked to the retirement plan or a separate, stand-alone annuity sold to participants via the plan.

Among plan sponsors already offering in-plan options, many are doing so as the qualified deferred investment alternative, according to Matt Drinkwater, corporate vice president of annuity and retirement income research at LIMRA.

“The qualified default investment alternatives (QDIA) results indicate that the in-plan annuities are often (but not always) the designated QDIA, most often a target-date fund,” he wrote via email. “We didn’t see any differences [in whether it’s a QDIA or not] by size of plan or size of employer.”

About half (49%) of plan sponsors surveyed who do not offer an in-plan option have considered adding one “at some point,” LIMRA found.

Advisers Key

LIMRA noted that large, established plan sponsors have been first to offer participant in-plan annuities, with growing interest coming from the smaller end of the market. It also found that plan advisers or consultants often play a key role in a plan sponsor considering an in-plan option, coming in second among the top reasons for providing the option.

The reasons, in order, were:

• Plan sponsors feel obligated to help employees have income in retirement (43%);
• Plan sponsors had an in-plan option recommended by a plan consultant/adviser (39%);
• Plan sponsors feel the best place to create retirement income is from the plan (37%);
• Plan sponsors want to manage workforce turnover/retirements by providing an income option (36%);
• Employees are demanding the option (35%); and
• Plan recordkeepers are recommending the option (22%).

LIMRA also cited a “strong connection” between employers who offer or have offered defined benefit pensions in the past and current interest in providing in-plan annuities.

“Employers offering DB pensions—active or frozen—tend to offer in-plan annuities to a greater extent than do employers who do not have DB pension plans,” LIMRA researchers wrote in the executive summary. “Also, employers who used to offer DB pensions are more likely than other employers to offer in-plan annuities.”

Earlier this month, PLANSPONSOR, a sister publication of PLANADVISER, reported that technology giant IBM plans to replace its 401(k) employer match with automatic contributions to its cash balance plan. The new retirement benefit will create what a spokesperson for the firm called “a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and options.”

Obstacles 

There are still several obstacles to wholesale implementation of in-plan annuities, according to LIMRA.

The biggest block, according to the trade group’s executive summary, is lack of demand among employees. That dearth of interest, however, may be due to lack of knowledge about the potential for a guaranteed paycheck, according to the researchers.

“The vast majority of workers have either never heard of in-plan annuities or know little about them—not enough to make a fully informed decision about how appropriate they might be,” LIMRA researchers wrote. “Also, demand can be increased by employers, by taking the time to explain them, offering group meetings, and building broad awareness prior to adding an in-plan annuity.”

Many employers are also concerned with the products themselves, citing cost, complexity and lack of portability across retirement plans among their reasons not to offer in-plan annuities.

Limited attention and resources of human resource departments may also play a role in the lack of uptake, LIMRA noted. Smaller employers are particularly apt to pass on annuities for this reason and would be more likely to bring them on if presented as “turnkey, plug-and-play” solutions in plan design.

Finally, fiduciary concerns about providing in-plan options were mentioned by plan sponsors but were generally lower down on the list of issues, LIMRA’s researchers wrote. Fiduciary concern has likely abated in recent years after in-plan annuities were approved by regulators, including in 2019’s Setting Every Community Up for Retirement Enhancement Act, according to the researchers.

Whatever the outcome of in-plan uptake, LIMRA made clear the role plan advisers and consultants will play in their future: 79% of plan sponsors who do not yet have an in-plan option relied on advisers or consultants when evaluating the option.

“Building awareness and buy-in among the plan advisor community will be critically important for the growth of the in-plan annuity market,” LIMRA researchers wrote.

LIMRA surveyed 209 sponsors of DC plans offering in-plan annuities and 357 sponsors of DC plans that do not offer in-plan annuities. Results were weighted to ensure they were representative based on plan size for DC plans with 10 or more active participants.