Teachers Insurance and Annuity Association (TIAA) has used group annuities to give millions of teachers a comfortable retirement, by offering them annuity-based versions of the 403(b) plan — the ancestor of the 401(k) defined contribution plan.
Since TIAA popularized the 403(b) plan, it has turned into such a big, diversified retirement services provider that even some people in the financial services sector have no idea that, in its heart, TIAA is an insurance company.
Now, TIAA is putting the focus back on annuities, by promoting efforts to add “annuitization options,” or access to lifetime income annuities, to 401(k) plans and other defined contribution plans.
TIAA was part of the broad coalition of life insurers, other financial services companies, and labor and consumer groups that persuaded Congress to pass the Setting Every Community Up for Retirement Enhancement Act of 2020 (Secure Act), at a time when little gets through Congress.
One provision in the Secure Act encourages employers to offer retirement plan annuitization provisions, by offering a strategy an employer can use to pick an annuitization option provider without having to worry about being sued over problems with the annuitization option provider.
Tim Walsh, a senior managing director at TIAA, helped TIAA persuade members of Congress to pass the Secure Act. He testified on behalf of the bill that created the law in May 2018, at a hearing on Capitol Hill organized by the U.S. House Education and Workforce Committee’s Health, Education, Labor and Pensions subcommittee.
Here are five things Walsh said about the new retirement plan annuitization option market, drawn from a recent email interview.
1. Some retirement plans that are close to Walsh’s heart have been offering annuitization options for a long time.
To laypeople, 403(b) plans are simply 401(k) plans for teachers.
But there are actually differences between 403(b) plans and 401(k) plans. One, Walsh said, has to do with annuitization option access.
In the 403(b) plan market, “institutional annuities are widely offered by employers,” Walsh said. “Many not-for-profit employers offer both fixed and variable institutional annuities, allowing participants at retirement to receive fixed guaranteed income payments, variable lifetime income payouts, or a combination of the two.”
2. Encouraging workers to insure their retirement income against longevity risk is important.
“As baby boomer retirements accelerate and life expectancies continue to rise, it has become increasingly important that we ensure individuals not only save for retirement, but also have easy access to products that provide a guaranteed income throughout retirement,” Walsh said. ”Annuities are the only private market solution that offer guaranteed returns and guaranteed income, and therefore provide retirees with exceptional protection that acts like a personal pension.”
3. Annuitization options can live peacefully with other income planning strategies.
If a retirement plan sponsor offers an annuitization option, a retiree can use that option alongside other methods for tapping plan assets, such as making systematic withdrawals, Walsh said.
4. Plan annuitization options have big advantages over individual annuities.
Walsh, who works for a company that sells annuitization options, said in-plan, or institutional, annuities provide better outcomes than giving plan participants a vehicle for buying individual annuities.
Institutional annuities “offer institutional pricing, focus participants on lifetime income as the goal during the accumulation phase, provide guaranteed returns during the savings years, and make it easier for participants to annuitize at retirement,” Walsh said. “And unlike institutional annuities, retail annuities may have high surrender charges, high sales loads, and high investment expenses.
5. Low interest rates may increase the appeal of in-plan annuitization options.
An institutional annuity gives a plan participant a way to dollar-cost-average cash into the annuity over a lifetime, in many different rate environments, and that helps reduce the impact of a temporary drop in interest rates on the plan participant’s retirement income, Walsh said.
— Read 7 (Polite) Life and Annuity Player Whoops of Joy for the Return of the Secure Act, on ThinkAdvisor.