Make sure that “in-plan” annuity products are delivered clearly and in a way that defined contribution plan participants can understand, advises “Guaranteed Annuities in Defined Contribution Plans,” a new report form Financial Research Corporation, Boston.
These are products that provide guaranteed income options inside of DC plans. But, they are new and need to be simple to explain and understand, says Luis Fleites, a vice president at FRC and the author of the report.
Without sufficient clarity, DC plan investors and participants may experience a “disconnect” when measuring the value of such guarantees versus the cost, he cautions. They may also experience a disconnect when comparing the solution (to their guaranteed retirement income need) with other available products.
What to do? The report suggests that product manufacturers do the following:
1) Replicate mutual funds, when creating the product structure or vehicle. That is, model the products around funds with which participants are already “familiar and comfortable.”
Example: Provide units or shares that denote ownership and are linked to a value.
Replication with familiar products will help create broader and quicker product utilization, the report maintains. It may also help plan participants “overcome their fear of a new product or their potential aversion to annuity-life products,” the report says, adding that “the end goal is to create the perception or reality that these products are just another investment option or asset class to meet retirement goals.”
2) Offer a dollar cost averaging approach. Plan participants know this approach enables them to benefit from market ups and downs over time, the report points out. “The same applies to purchasing deferred income annuities, since an investor is not subject to interest rates at one point in time.”