By: Randy Myers
Retirement plan sponsors have been slow to embrace them, but financial services firms continue to roll out life- time income products for the 401(k) market.
These new products are designed to help retirement plan participants generate a steady stream of income in retirement, much as they would if they con- verted their nest egg into an annuity. These new products are considered especially timely in the wake of the most recent financial crisis, particularly in light of the diminishing effect of those challenged by the markets in almost all investment accounts , which is especially worrisome for many recent retirees and those nearing retirement.
To date, the new products have typically taken one of two forms, Paul French, portfolio strategist for Diversified Investment Advisors, an investment advisory firm specializing in retirement plans, told participants at the 2011 SVIA Spring Seminar. One approach wraps a guaranteed minimum withdrawal benefit, or GMWB, around an underlying investment, usually a target-date or asset-allocation mutual fund. The other takes the form of an in- plan version of a traditional deferred fixed annuity.
With GMWB-based products, lifetime income payouts generally begin at a particular retirement year and equal a percentage of the participant’s guaranteed income “base.” That base is established
with the participant’s first contribution to the product and increases with additional contributions. It cannot go down in value if the participant does not take withdrawals beyond the specified amount. It typically resets to an even higher value at periodic intervals if the account’s market value goes up. Payouts are expressed as a percentage of the benefit base and are usually higher the older the participant is when withdrawals begin.
Companies offering products in this space, French said, include Prudential, John Hancock, Transamerica, Milliman, Great- West, and AllianceBernstein.
Diversified Investment Advisors also has launched one.
With the annuity-based, fixed products, a participant’s contributions are typically invested in the issuing insurance company’s general account. The contributions are used to purchase a future guaranteed income stream based on the amount of the contributions, the annuity purchase rate, the participant’s age at the time of contribution, and the participant’s age when they start taking income. Income distributions can start at any time subject to plan rules and are sometimes available with cost-of-living adjustment riders.
Companies offering annuity products, French said, include Hartford, MetLife, BlackRock, and Mutual of Omaha.
French said all of these guaranteed minimum products have been designed to let retirement plan participants lock in a mini- mum level of retirement income while still participating in the broader financial markets as well as to guarantee that income regardless of how long their principal lasts or how long they or their spouse lives. They’re often viewed, he noted, as a way to help participants replace income that in years past might have been provided by defined benefit plans.
Despite the advantages offered by these new income products, French conceded that many plan sponsors have yet to embrace them, concerned that they add an extra layer of fiduciary responsibility with respect to the underlying insurance feature. If and when the Departments of the Treasury and Labor (DOL) issue additional guidance on that subject, he said, it could pave the way for greater acceptance.
“I think the DOL is for the most part receptive to this product,” French said. “They want to make it easier for sponsors to add this to their plans.”
A few other issues are depressing adoption rates, he said. These include the need to educate participants about how and why they might want to use the products, and concerns about the products’ lack of portability. In most cases, an investor wanting to take one of these products out of their retirement plan today could move it only into an IRA offered by the product’s issuer.
French added that while the jury is still out on whether life- time income products and stable value funds could coexist within 401(k) plans, the new products could be seen as competition to the principal protection guarantee that stable value products provide.