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Insurers Tout Annuities as Defined Benefit Plans Become Increasingly Rare

For decades, American workers relied on two principal sources of retirement income: Social Security benefits and employer-paid pension plans. Both promised retirement benefits for life. Today, Social Security is playing a dwindling role in meeting the American worker's retirement income needs (see "Social Security 101" elsewhere in Stable Times), and defined benefit pension plans are becoming increasingly rare. In their place have sprung up defined contribution plans, in which the worker's retirement benefit depends largely on how much he is able to save for himself and how well he manages what he does save through retirement. Combine this responsibility with ever-longer life expectancies, and many workers risk of outliving their retirement savings.

To ensure that retirees have sufficient income, insurance companies have launched a drive to market annuities to workers saving for, or about to enter, retirement. Annuities provide the purchaser with a lifetime income stream. The theory behind the push is that by using at least a portion of their savings to fund an annuity, investors can be guaranteed at least some income no matter how long they live. Many of these new products have been tooled specifically to appeal to participants in defined contribution plans.

The chance of outliving your retirement savings is not insignificant. Speaking at the SVIA Forum, Keith Hylind, vice president of retirement income strategies for MetLife, reported that a 65-year-old man has a 50 percent chance of living beyond the age of 85 and a 25 percent chance of living beyond the age of 92. A 65-year-old woman has a 50 percent chance of living beyond the age of 88, and a 25 percent chance of living beyond the age of 94. That's a long time to fund a retirement. Over such long periods of time, inflation risk is a real concern, too. At just a three percent annual rate of inflation-about the historical norm-prices double in 24 years. The impact of inflation can be even worse in the healthcare arena, where many retirees ring up high costs. Health care inflation has been running at more than twice the average inflation rate.

To help workers cope with longevity and inflation risk, MetLife has developed a suite of annuity products with a wide array of features. Some provide immediate income, others defer payouts. Some provided a fixed income, others variable payouts. Some can be offered as a distribution option in a defined benefit plan or defined contribution plan, or as part of an IRA rollover. Another-what MetLife calls its "Personal Pension Builder"-is offered as a supplemental retirement savings plan intended to complement an existing 401(k) plan. Workers can make recurring contributions to the product while they are employed, then choose from a variety of payout options when they retire.

Insurance company Genworth Financial also is targeting the retirement market with a product it calls ClearCourse, which is designed to be offered as an investment option in 401(k) plans. Plan participants can allocate some or all of their retirement savings to ClearCourse, just as they would to any other investment option.

James Templeman, vice president and group variable annuity product development leader for Genworth's GE Life and Annuity Assurance Co. division, explained that monies investors steer into ClearCourse go into a separate account which invests in a balanced stock-and-bond portfolio managed by GE Investments. The product provides investors with a guaranteed minimum lifetime stream of income, although the actual payout can exceed the minimum depending upon how well the Total Return Fund has performed. Investors can start taking a monthly payout when they reach their plan's designated retirement age, or at a later date of their choosing. Because the Total Return Fund maintains a relatively constant allocation to equities-about two-thirds of total fund assets, Templeman says-it provides investors with a long-term hedge against inflation risk.

Annuity products such as those offered by MetLife and Genworth may or may not outperform a portfolio of stocks, bonds or mutual funds a retirement plan investor might assemble on their own. However, annuities assure the investor of receiving some level of guaranteed income for as long as they live.

Read Next: IRAs and 401(k)s: How Employers Can Help Retirees Make It on Their Own