U.S. Insurers Scale Back Income Guarantees

Half of the U.S. insurers surveyed by Cerulli for the second quarter issue of The Cerulli Edge – Retirement Edition indicated they are planning to decrease the number of product offerings that include “living benefits” in the next three years. And another 27% of insurers say their number of lifetime income guarantee products will remain about the same.

Cerulli warns this trend could add to workers’ and retirees’ concerns about the possibility of outliving their savings, either because of insufficient accumulation in the first place or lengthening life expectancies and cost-of-living increases. Even as the availability of lifetime retirement income products declines, financial advisers report that a general lack of awareness around lifetime income needs and offerings is the most significant obstacle to providing retirement income advice to their clients.

Lack of client awareness around income-related issues is cited as a top concern by about 30% of advisers surveyed by Cerulli. Nearly 25% of advisers say the time consuming nature of purchasing, explaining and implementing lifetime income solutions is another significant barrier. Other common difficulties include client resistance based on unclear benefits and high perceived costs.

Even for well-informed advisers and clients, Cerulli says a number of external factors have made the process of purchasing and implementing lifetime income solutions more challenging in the current market environment. Historically low interest rates call into question the effectiveness of fixed-income investments as a foundation for an ongoing income stream, researchers explain. Low interest rates also pressure insurance firms’ ability to profitably invest their general account assets, Cerulli explains. This further restricts income solution availability and attractiveness.

Another income solution challenge facing advisers is that a large share of the investing population will do very little or nothing to plan for retirement, Cerulli says. Income solutions therefore must be tailored to help these unprepared investors make decisions and review options for meeting income needs. Cerulli says advice is likely to be sought in the final years before retirement. Products should be designed with this scenario in mind, researchers suggest.

Cerulli finds deferred income annuity (DIA) products, which operate essentially as a longevity hedge by paying a guaranteed lifetime income at a predetermined date, could play an important role in expanding the availability of lifetime income guarantees for the average workplace investor. The most recent wave of DIA product development focused on features to make these annuities more flexible, Cerulli explains, allowing investors to change when they take income, elect lump sums, or choose a rising payment to hedge against inflation.

Insurers with captive salesforces, such as New York Life or Northwestern Mutual, dominate sales of DIAs, Cerulli says. Researchers recommend that insurers and advisers consult with key third-party distributors for future product development if they wish to broaden DIAs’ appeal and increase their adoption by clients.

To date, guaranteed lifetime income in defined contribution (DC) plans has experienced uneven adoption. Cerulli says estimates range from 25% to 50% of all DC plans offering some type of guaranteed income option. Observers frequently agree that despite plan sponsor interest, adoption by individuals is relatively low—comfortably less than 10%. There exist myriad reasons why the products have not caught on, Cerulli explains, including plan sponsor conservatism, limited participant education and communication, timing issues, and lack of flexibility.

Cerulli suggest plan design changes may be required to boost adoption of income guarantee products, as nearly half (46%) of sponsors surveyed by the firm agreed with the idea that participants should leave assets in the plan at retirement during drawdown phases while not offering a specific income option on their plan’s menu.

Broadly, employers appear to fall in one of two camps on the income guarantee question, Cerulli says. The first camp includes a class of employers who increasingly take a holistic approach to their employee benefits philosophy. These employers approach benefits from both a caring and pragmatic standpoint, Cerulli explains, believing that a strong benefits program is the right thing to do and will enhance employee retention and satisfaction.

In Cerulli’s survey of plan sponsors with more than $100 million in assets, nearly half believed that participants should stay in the retirement plan, even after they retired and have started taking income. In addition, approximately 20% of plan sponsors had either implemented a retirement income option or planned to in the near future.

The second camp consists of approximately one-third of plan sponsors who believe that participants would be better served by rolling over their retirement assets after leaving employment or when they retire, Cerulli says. These employers often feel that increasing the company match or implementing automatic enrollment, two of the primary levers a plan sponsor has to increase participation, would ultimately increase the employer’s payroll costs and potentially strain the company’s finances. Employees in this camp may face additional challenges as they exit the plan environment and search for stand-alone guaranteed income products.

More information on how to obtain the latest edition of The Cerulli Edge – Retirement Edition is available here.