As the defined contribution plan debate has shifted focus from how best to help people accumulate during their working years to how best to help them generate guaranteed income in their retirement, there are some who believe that giving individuals the opportunity to invest in income-generating products such as annuities during their working years, and as part of their 401(k) plan, is important to their future.
Most people typically consider and invest in annuities after they retire, when the fear of outliving their savings or not having sufficient income for the rest of their lives oftentimes becomes a reality, says Fred Conley, president of the institutional retirement income group at Genworth Financial. But offering people the opportunity to invest in annuities during the accumulation phase of their retirement finance trajectory, rather than having them fork over a lump sum after they retire, can help a great deal in assuring that they have the necessary income for the years following their retirement, he says.
"We have seen that there has been a lot done to improve enrollment and participation in retirement plans, but there is still a great gap in terms of helping people with investing for lifetime income," Conley says. "Being able to buy an annuity before retirement gives people greater insight into the product as well as a floor level of income and protection against outliving their savings."
Clearcourse, a Group Variable Annuity, issued by Genworth Life & Annuity, is an innovative 401(k) investment option designed to help participants build a source of lifetime retirement income during their working years. Each investment into ClearCourse buys a certain amount of lifetime retirement income based on the age of the participant. Once a ClearCourse participant retires, he/she can elect to begin receiving a stream of income that is guaranteed for life.
"The younger a participant is when investing in ClearCourse, the more lifetime retirement income can be secured with each new investment - you are buying layers of income that keep accumulating," Conley says.
Currently, ClearCourse is available in a growing number of retirement plans of different sizes. Conley believes that more and more retirement plans will start to offer annuities as part of their investment line-up for working people. Group annuities are a cheaper option for individuals than having to purchase them solo, he says, but more importantly, retirement plans need to make sure that they do feature these kinds of lifetime income options, especially in light of the recent financial market crisis. "Even people who did everything right still got hammered in the crisis and they couldn't retire as they wanted," he says. "Because of this, retirement plans want to increase the odds that their participants have a good outcome and I think that these products are an essential part of that."
But while there's no doubt that there is a far greater focus on the issue of guaranteed income from many in the retirement finance field - even the Department of Labor (DOL) and the Treasury department are focusing efforts in this area - one has to be very careful when thinking about including all forms of annuities in a retirement plan, says Drew Denning, VP of income solutions at Principal Financial Group in Des Moines, Iowa, not least because there is still a great deal of confusion with respect to the different kinds of annuities available in the marketplace.
Principal, like many insurance companies, does offer income annuities as an option available for their retirement plans, but strictly for individuals who are retiring, Denning says. These products are group priced and can be activated at retirement if plan participants choose them as a distribution option, he says. They are completely different from the newer type of in-plan annuities that combine accumulation and income distribution - products, he believes, that should not be included in a 401(k) line-up.
"There are fundamental problems with putting these kinds of products into an employer-sponsored plan, not least because they are very complex and difficult to understand, and many people think that the guarantee they offer is for their principal," Denning says. "I'm very nervous to think about people putting their money into a product and thinking that their principal is protected from any market downturn."
One significant issue for plan sponsors is a lack of portability of these newer type of in-plan annuities if the employer changes plan providers. Unlike a mutual fund, there is no way to swap out one company's in-plan annuity for another company's in-plan annuity, Denning says.
He also believes that working people who pay into these newer type annuities through their accumulating years could face a serious drag on their account balances from higher expenses which then will make things even tougher for them going forward.
All in all, Denning believes that individuals should be saving more from the outset in order to offset their income worries in the future. Having to pay during their working years for an income guarantee in their retirement is not the answer, he says, so even if some plan sponsors do have an interest in ensuring that their employees have enough to live on in retirement, they would do better by helping them save more through their working years.
Conley says that many plan sponsors are still leery about including income generating annuities as part of a 401(k) line up and they feel a need to fully understand how these products work and how investing in them during the accumulation years can pay off in retirement. As with any new product, the uptake is slow and it takes a while for plan sponsors to feel comfortable with anything new, he says. Many plan sponsors are also waiting for the government to issue explicit regulation in this area, he says.
"Administering a guaranteed lifetime income product is also different so the recordkeepers need to have their arms around what it takes," Conley says. "If you look at the history of 401(k) plans, change has taken time and it takes a while to build up infrastructure for new products. I still believe that it's important to ensure that plan participants have a secure outcome in their retirement and these products are a good part of that."