Annuities, Retirement Plans and COVID-19

As employees balance pressing financial needs with saving for retirement during the COVID-19 pandemic, helping them get to and through retirement has become even more critical for employer-sponsored retirement plans.

If you are a financial professional who has focused on individual products, or on employee benefits other than retirement plans, maybe you can play a role in educating employers about the need for options like in-plan annuities.

Most employees are familiar with the getting "to retirement" part; they understand the need to continually contribute to their retirement plan, diversify across asset classes, and review and rebalance over time. It is the "through retirement" that is less familiar, and requires more than just asset allocation while spending down the accumulated savings.

Employees need protection against outliving their assets, as well as inflation, and they can benefit from thinking about a diversified income strategy well before retirement is on the horizon.

The Impact of Longevity

Many are familiar with the Centers for Disease Control and Prevention January 2020 mortality report showing that the average life expectancy has increased in recent years to 78.6. However, it is important to keep in mind that this is life expectancy at birth; the older one gets the longer one is expected to live. Clearly, someone on their 78th birthday does not have a life expectancy of only a few more months! In fact, the Social Security Administration assumes that the average 65 years old retiree will live an average of about 20 years (more for females, less for males). As this is an "average," it's not that uncommon for people to spend as many as 25 or 30 years in retirement. Some people will spend more years in retirement than they did working! A lot can change in the decades of retirement; factors like market volatility — much like what we've been experiencing in 2020 — and potential cognitive decline can impact retirement income.

This is where the "through retirement" part becomes a factor, as an employee's portfolio is called on to provide income and financial support during retirement. As COVID-19 has taken a toll on American's financial wellness, it is more important than ever to ensure individuals are setting themselves up for a secure retirement. According to a recent survey by TIAA, 89% of individuals say that it is important to have a source of income that will not run out in retirement.

What Employers Can Do

Employers can build their employees' confidence and help them achieve better outcomes by helping them create a diversified retirement income strategy in advance of retirement. One way to do this is by offering options like in-plan fixed and variable annuities designed to combat some of the most challenging retirement risks while creating lasting income in retirement. While these two types of annuities each offer individual benefits, fixed and variable annuities can be more powerful when used together:

1. They provide opportunity to both grow savings and provide a sustainable source of income in retirement. Fixed annuities offer growth while employees are saving, with a minimum guaranteed crediting rate regardless of market performance. In retirement, fixed annuities give employees steady income that never runs out and helps pay for everyday necessities. Variable annuities bring together the power of diversified investing including exposure to equities, with income payments that fluctuate in value during retirement. Even when employees are receiving income in retirement, variable annuities remain invested across their specific asset classes, strategies, styles and sectors to potentially grow and help weather inflation and other risks.

2. They work together to reduce risks that can erode retirement savings. Consider how inflation can affect a retirees' income. Social Security benefits can help employees fight off inflation through annual cost-of-living adjustments. However, for the vast majority of retirees, Social Security will not be enough to make ends meet. A fixed annuity can help bridge the gap, but in most cases inflation will reduce its buying power over time. And that is where in-plan variable annuities can add value to the portfolio, with the potential to provide increased income during favorable market periods. Of course, payments from variable annuities can decrease in down markets, so a portfolio diversified with fixed annuities along with variable annuities invested in different asset classes can help mitigate this risk.

3. They allow employees to consider being more aggressive with other parts of their portfolios. With the dependability of receiving lifetime income from annuities, retirees may choose to be more aggressive with other parts of their portfolios. After all, we are not suggesting an employee annuitize an entire portfolio! For example, by allocating a portion of savings to a fixed annuity to add to the Social Security's "income floor," and allocating another portion of their money to variable annuities to allow for lifetime income with upside potential, investors may choose for their remaining assets to be more heavily invested in equities. While the market volatility of an equity-heavy portfolio can make anyone nervous, the assurance that comes with knowing that lifetime income is secured should help alleviate some of this fear, and in retirement could mitigate the risk of having to sell shares at a low price.

A plan structure that includes in-plan annuities creates the type of compelling benefits program employers can use to better manage their workforce — from recruiting to retaining to retiring. According to the same survey by TIAA, 71% of nonprofit workers say that knowing they had guaranteed lifetime income in retirement throughout this challenging time made them feel more resilient. A diversified portfolio that includes options for both fixed and variable annuities may provide employees with more confidence, better retirement outcomes, the ability to retire on time, and the reliability of having income for life. By adding both options to an organization's plan menu, employers offer their employees opportunities to get to and through retirement.

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Benny Goodman, FSA, MAAA, is vice president — annuities at TIAA.