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September 16, 2024 at 01:21 PM
What You Need to Know
- Some predict that in-plan annuities will be huge.
- Getting workers to take up anything optional may be difficult.
- Older in-plan annuitization options had takeup rates under 5%.
Combining a plain vanilla default investment strategy with a plain vanilla annuitization option might sound great to advisors.
But Sri Reddy, a senior vice president at Principal Financial Group, says that advisors are different from the participants in a typical 401(k) plan.
With a typical 401(k), persuading participants to make active choices about an income option is difficult, Reddy said in a recent interview.
“Unless you make it a default, you get limited uptake,” Reddy said.
What it means: Even when an employer offers an annuity option that’s almost a default option, getting employees to make an active choice may take an active effort to give the employees personalized advice.
QDIA history: Many employers once offered employer-managed defined benefit pension plans.
As regulators began making employers take their pension promises seriously, and once employers began to understand how difficult it was to make good on promises based on mortality and investment assumptions that might extend 80 years or more, employers began to replace pension plans with defined contribution plans, which provided retirement cash without income promises.
In recent years, employers have responded to the participants’ confusion about investments by adding “qualified default investment alternatives,” which, in most cases, have turned out to be target-date funds, or investment funds designed to tilt more toward relatively low-risk assets as participants within a given age range get closer to their anticipated retirement.
A QDIA sibling: Some defined contribution plans funded by a group variable annuity contract always provided a built-in tool for converting part or all of the assets into a stream of lifetime income.
But typical plan sponsors provided no annuitization option. They assumed that workers would convert their retirement plan assets into streams of income by taking a little cash out every month, or by buying individual annuities.
Many participants have not been sure how to do that. Regulators have argued that many retirees who buy individual annuities end up paying high sales commissions for mediocre annuities, or, sometimes, paying cash to con artists who simply run off with it.
Now, financial services companies are trying to address retiring workers’ confusion about how to tap their nest eggs by offering in-plan annuitization options.
