Today approximately 22,000 retirement plans offer guaranteed income solutions with between $2.5 and $3.0 billion in market value invested in these products. The number of plans offering guarantees has grown by 53 percent over the past two years, while the assets in these vehicles have risen 62 percent over the same time period.
Non-insured security/investment solutions can help participants achieve retirement income at a possibly lower cost with upside potential in the market, but without the guarantee that the money will last for a participant’s lifetime. They also offer no protection of retirement income in a down market.
Some traditional insurance solutions provide a guarantee of lifetime income that avoids market losses, but restricts the opportunity to capture market gains since the rate of return is guaranteed and fixed. These annuity solutions have been used both in and outside of retirement plans. The principal advantage of traditional fixed annuity contracts is that they guarantee income payments for the life of the participant and/or his or her spouse.
Guaranteed withdrawal benefits (GWB) are often combined, or “hybrid” solutions that consist of a mutual fund, such as a balanced or target date fund (or similar diversified investment vehicle), and a guaranteed withdrawal benefit feature, which is issued by an insurance company3. The contractual provisions include income for life, access to assets at any time (subject to plan terms) — during the accumulation period as well as the payment or income period — and protection of guaranteed income in down markets, while enabling savers to participate in rising markets. These solutions may be more expensive than other non-insured solutions.
There are several potential benefits to plan sponsors and to participants offering in-plan guarantee solutions:
Benefits for Plan Sponsors
- Investment options. Employers that are concerned with the benefit adequacy of their plans can look to guaranteed income solutions to help prevent the possibility of participants spending down their retirement savings too quickly.
- Integration into existing target date or asset allocation solutions. Several plan providers offer a variety of target-date funds and custom glide path solutions that enable employers to have a choice with GWBs, how to best apply them to their investment menu, and how to integrate the solution into the glide path of the target date portfolio.
- Cost savings. Employers may be able to offer in-plan solutions at a lower cost to plan participants because the solutions are institutionally priced.
- Tool to attract and retain top talent. These solutions can be used by human resources and benefits departments to attract and retain top talent for participants at all levels by providing a competitive retirement benefit for employees.
- Help transition employees into retirement. With market declines, participants closer to retirement may feel the need to work longer, thus creating fewer opportunities for advancement for employees who are earlier in their career. An in-plan guarantee solution may help participants closer to retirement leave the workforce when they are ready. The solution also creates career opportunities for high potential employees to fill positions of more senior level professionals who are leaving the workforce.
Benefits for Plan Participants
- Institutional pricing. An in-plan guarantee investment option may receive the benefit of institutional pricing resulting in lower fees.
- Tax-deferral. When investing in an employer-sponsored retirement plan there is the additional benefit of tax-deferral on contributions inside the plan versus outside.
- Asset protection before retirement. Participants have the advantage of protections and guarantees during the “red zone” — the years immediately before retirement.
- Help to stay the course with savings. Downside protection helps give participants the confidence they need to stay the course during market volatility. By insuring their retirement balance against a down market, participants may be able to maintain a more appropriate level of equity exposure in their asset allocation. Better asset allocation may lead to better retirement outcomes for participants.
Because of the continued growth in adoption of these solutions and upcoming government regulations, in-plan guarantee solutions may have a more prominent place in the retirement plan industry in coming years. With the right education and knowledge of these solutions, plan sponsors may be better able to navigate their fiduciary responsibilities in choosing an in-plan guarantee to help create better retirement outcomes for their participants.
 Workplace Benefits Report, Bank of America Merrill Lynch, 2012
 In-Plan Guarantee Availability and Election Tracking Survey, LIMRA, May 2013
 Guarantees are based on the claims-paying ability of the issuing Company.