Help Plan-Sponsor Clients Meet the Demand for Annuities

Concern among retirement savers about the future of Social Security is certainly not new.

This continued perception that the system might run out of money is leading to interest in other sources of retirement income.

A majority of Americans who are participating in an employer-sponsored retirement plan now say they would take advantage of "income solutions" (read: annuities) if they were offered as investment options, according to the 2023 Schroders US Retirement Survey.

This year's Schroders survey, conducted by 8 Acre Perspective, polled 2,000 investors nationwide between the ages of 27 and 79.

Only 10% of those who aren't retired said they will wait until the full retirement age of 70 to begin receiving maximum Social Security benefits.

The most popular reason given for this decision (by 44% of non-retired respondents) was concern that Social Security could run out of money or stop making payments.

As a result, the Schroders survey found that eight out of 10 investors currently participating in 401(k) and other defined contribution plans view in-plan "retirement income solutions" (again, annuity plans) playing a vital role in their financial futures.

Furthermore, more than half of those participating in defined contribution plans who don't have access to an in-plan income solution, or don't know if they do, said they wish they did.

Embracing Changes

The demand for annuities in 401(k) plans comes at a time when regulatory updates will make it easier for plan sponsors to offer annuities to participants—and for participants to take full advantage of in-plan annuities.

A new law, the SECURE 2.0 Act of 2022:

Updated Internal Revenue Service (IRS) regulations so that the value of an annuity contract in a retirement savings account is no longer excluded from required minimum distributions, and annuity income is applied to required minimum distributions.
Raised the minimum purchase for a qualified longevity annuity contract, or deferred income annuity, in a retirement plan from $125,000 to $200,000, allowing more participants to buy annuities.

Furthermore, the original Setting Every Community Up for Retirement Enhancement Act of 2019, or Secure Act, simplified and clarified the due diligence that employers must conduct on insurance carriers before offering the carriers' guaranteed-income annuity products in their plans.

Overcoming the Obstacles

Despite the demand from 401(k) plan participants for annuities, and the regulations that make it easier for sponsors to incorporate them into their plans, only a little more than 10% of 401(k)s offer them.

According to the 2023 Hot Topics in Retirement and Financial Wellbeing report published by Alight Solutions, just 12% of defined contribution plan sponsors have annuities in their plans, and a mere 3% said they were "very interested" in adding annuities to their plans.

The lack of widespread in-plan annuity programs could be due to sponsors' fear of lawsuits.

Institutional Investor quoted a corporate investment chief as saying, "There's great fear of being sued later … One plan may not pay out as much as another one.

A lawsuit for lack of process is perfectly fine, but one filed for lack of perfection in selecting the exact fund with the best performance is not.

The demand for perfection scares plan sponsors from even dipping their toes in the water."

On the other hand, insurance carriers are also reluctant to bring their guaranteed-income annuities to plan sponsors.

Many carriers we interact with have indicated that they feel the contracts they would write for 401(k) plan participants would be too small to justify the effort.

Most annuity contracts have minimums of $20,000 — but, according to Fidelity Investments, although the average 401(k) account balance in the second quarter of 2023 was $112,400, the average account balance for Generation Z participants was $8,100.

The average 401(k) account balance for millennial participants was much higher, but, at $48,300, lower than the value of the larger annuity contracts that insurance carriers would prefer to write.

How Advisors Can Add Value

When they understand the concerns of insurance carriers regarding in-plan annuities, advisors can act as intermediaries on behalf of their plan-sponsor clients to help insurers with promising solutions to understand why it is in their interest to offer their annuities to 401(k) plan participants.

Another easy solution would be for advisors to work with their plan-sponsor clients to find 401(k) plan recordkeepers that also have annuity platforms, so they can obtain both services from a single provider.

With the future of Social Security an ongoing worry, financial advisors have an opportunity to work with their plan-sponsor clients to help them meet the demand for in-plan annuities.

By educating plan-sponsor clients about the regulatory changes and guidance that can make it easier for them to offer annuities, and potentially decrease their legal liability, advisors can play a role in strengthening their clients' plans while empowering those clients to demonstrate greater value to their participants as fiduciaries.

Michael Kazanjian is the chief marketing officer of FIDx, the organization that runs the Insurance Exchange platform for wealth managers and other financial professionals.