A new twist in retirement planning is taking hold: financial services companies are offering immediate annuities and longevity insurance–a deferred annuity–as an option in 401(k) plans.
The trend of using annuities and longevity insurance has heated up over the last few years as more retirees and those approaching retirement search for income generating investment solutions. “With longevity insurance or an immediate annuity, the client is saying they want to take payments in the form of an income stream either now or at a later point in time,” says Steve Roth, a partner with Sutherland, Asbill & Brennan in Washington.
Pat Harris, director of income products at The Hartford, says “investors should view guaranteed income products as an entirely new asset class, to exist alongside traditional stocks, bonds, and cash investments during both the accumulation and the income phase of retirement planning.” Harris continues: “Adding a guaranteed income product to the mix at both ends of the spectrum–while both saving for retirement and then taking income while in retirement–can help decrease investment risk while, potentially, increasing investment return over the longer term.”
The Hartford began marketing its Lifetime Income product to plan sponsors in early 2006. The plan allows employees to make payroll contributions to purchase “income shares,” which eventually provide $10 per month per share in guaranteed income at age 65. “The price per share will vary based on a number of actuarial factors, such as the age of the participant and current interest rates,” Harris says.
A Platform Unto Itself
While group annuity platforms have been a mainstay of the 401(k) and defined benefit world for some time, Roth says the new approach taking hold now is “treating a fixed annuity or longevity insurance as a distinct investment option [in 401(k) plans] and as a platform unto itself.” For instance, the plan participant could choose from an array of mutual fund options in a plan and also be able to allocate a certain portion of their money to the insurance contract. “Historically, employers may have had mutual fund options for accumulation, or they’ve had the group annuity option with payout options attached, but it was principally an accumulation vehicle,” adds Michael Koffler, also a partner with Sutherland, Asbill & Brennan.
Of course, the challenge for advisors will be to help their clients determine the right mix of options and how much a participant should put in an accumulation vehicle versus an income product. “Because these products are relatively new and because they are first being put on employer sponsored plans–they are also available as standalone products–I think you’ll see people marrying longevity insurance and income annuities to different types of products and types of accounts over the next few years because it’s a great tool to allow advisors to fill a hole in someone’s portfolio,” Koffler says.
The term longevity insurance has only been around for a few years now, and Roth explains that longevity insurance–which uses a deferred annuity as the investment vehicle–is “typically conditioned on the plan participant reaching a stated age before the payments begin.”
Other companies that have caught on to the income trend are Fidelity (see News & Products, page 124) MetLife, Prudential, Merrill Lynch, and Genworth, which also have versions of lifetime income products. Wachovia, too, has a product called Income Solutions, which the bank says “facilitates annuity purchases via an IRA rollover.” The program, Wachovia says, helps participants convert “retirement accumulations into a guaranteed monthly income for life or a specific time period of 5, 10, 15 or 20 years.”
Chris O’Flinn, president of ELM Income Group in Washington, says the trend is for both “inside-the-plan solutions and outside-the-plan solutions.” The inside-the-plan solution “typically builds up an annuity inside the plan, which turns into a distribution when the person retires,” O’Flinn says. The outside-the-plan solution “leaves the plan accumulation to the existing investment options as they are changed going forward by the plan management, and comes up as an alternative when it’s time to construct the retirement income program,” he continues. “That’s typically done through a rollover. The annuity can serve as part of the IRA or it can be an IRA as standalone, which is called an IRA annuity.”
Washington Bureau Chief Melanie Waddell can be reached at email@example.com.