6 Roadblocks Holding Advisors, Clients Back From Annuities

What You Need to Know

With the decline in company pension plans, clients need to find replacements for guaranteed income.
Advisors have different view from the reality of how much clients want annuities as part of their savings.
A new metric system is being developed to help advisors compare annuity options for their clients.

In 1975, there were just over 311,000 private retirement plans in the United States. Of those, 103,346 were defined benefit, or pension plans, while 207,748 were defined contribution plans, according to statistics from the Employee Benefits Security Administration of the U.S. Department of Labor.

In 2019, the total number of private company plans was 733,678. Only 46,870 of those were private defined benefit plans, while 686,809 were defined contribution plans.

As these statistics show, the retirement savings outlook has changed. Advisors need to learn how to help clients make up this lost guaranteed income, according to several retirement experts on a recent webinar held by the American College of Financial Services.

The panel discussion examined where and how annuities could fit into defined contribution plans as well as retirement portfolios, and how advisors need to be educated on these products for their clients’ benefit.

Wade Pfau, professor of retirement income at the college, moderated the session that was joined by Tamiko Toland, director of retirement markets for Cannex, which provides data and pricing on annuities and other products, and Michelle Richter, founder and principal of Fiduciary Insurance Services and executive director of the Institutional Retirement Income Council.

Steve Parrish, ACFS adjunct professor who introduced the group, stated that annuity sales were up 12% from 2020 to 2021. But there still is a lack of understanding of the product, he said.

“It’s kind of like life insurance: It’s become very complicated,” Parrish said. “Consumers are worried about losing their benefit If they die young. They’re worried about investing in annuities in an inflationary environment.” Also a problem was “market noise,” that is, “fussing over costs and commissions.”

On that note, Pfau, Toland and Richter had several insights on annuities during the ensuing conversation. Check them out in the gallery above.

1. The shift toward defined contribution plans means many investors don’t understand what’s in their portfolio.

The drop in pension plans will leave many people behind, especially those born in the 1940s and 1950s, Richter said. Further, she doubted many people understood what was in their current plans, or that income from those plans is not guaranteed.

Pfau agreed, noting that “when we shifted from defined benefit to defined contribution with 401(k)s, it's really ‘undefined contribution’ because it all became voluntary and people had to make these decisions within the context of assets and they don't know how to translate those assets into liabilities.”

(Image: Shutterstock)

2. Advisors are not on same page as their clients.

Toland described a study conducted by her firm finding that financial professionals thought just 18% of their clients were extremely interested and 63% of clients were somewhat interested in purchasing annuities, while they believed 19% weren’t interested at all.

This doesn’t jibe with a survey of investors, in which Cannex found 42% stated they were extremely interested in including annuities in their retirement plan, 31% were somewhat interested, and 17% were not interested at all. Ten percent already own an annuity.

“You see it's about a little over 80% [of] both financial professionals and investors [who] see them as being extremely or somewhat appealing,” Toland said. “But the thing is that the interest among investors is actually quite a bit more intense than financial professionals assume.”

Consumer research shows that “investors are a lot happier with their financial professional when they own annuities as part of [their retirement] plan,” she said.

(Image: Shutterstock)

3. The number and complexity of annuities confuse clients — and many advisors.

Multiple studies show that people really like what annuities do, but “the problem is that there is no such thing as a single annuity,” Toland said. “There's so many different kinds of annuities and there are many different applications. So being able to distill that down and properly deploy that within a plan is really the job of the financial professional.”

(Image: Shutterstock)

4. Advisors need to pick the right annuity for the client, not the least expensive option.

The Setting Every Community Up for Retirement Enhancement (Secure) Act “communicated” the government’s stance that “lifetime income within a plan could be quite useful,” Richter noted. Further, she said, solutions that include lifetime income should not be compared “at a cost basis” to those that don’t include it.

“Rather, the guidance says that the advisor should choose the solutions that provide the best cost benefit trade-off for the given plan,” she said.

She added that with Cannex, she was working on an “independently validated metric system” to help advisors and their clients better compare annuity offerings. They plan to have this system available by the end of the year, she said.

(Image: Shutterstock)

5. Adoption of annuities in DC plans is growing slowly — for now.

About 9% of DC plans have lifetime income options, Pfau stated.

Richter stated that there won’t be “material movement” in growth for a few years, especially as industry “mechanisms” need to be put in place first.

“For example, the insurance industry historically operates [somewhat] separately from the record-keeping communities,” Richter pointed out. “[But] there's technological work that's occurred now that enables these values to be reported within recordkeeping systems.”

(Image: Shutterstock)

6. Advisors need to understand clients' preferences first, then become clear on annuity solutions.

Advisors need to understand the “holistic” function of advising their clients, Toland said.

“Look first at what the clients are going to want and be satisfied with. It is less about optimization from running Monte Carlo [models] then it is about making sure that the client is comfortable,” Toland explained. “[Advisors] have got to be confident in the solutions that they're using: to be confident about the annuity provider, about the annuity design — and if there are components of it that [they] don't understand or don't trust.”

(Image: Shutterstock)

6 Roadblocks Holding Advisors, Clients Back From Annuities

What You Need to Know

Ginger Szala

Does Your Client Need an Annuity? Here's a Formula to Help Decide

More on this topic

DOL Fiduciary Rule Add-On Could Boost Annuity Distributors' Clout

Industry Players Weigh In on the DOL's New Fiduciary Definition

Finseca CEO Pans New DOL Fiduciary Regs, Sketches Litigation Path

BlackRock Launches In-Plan Lifetime Income Program

1. The shift toward defined contribution plans means many investors don’t understand what’s in their portfolio.

2. Advisors are not on same page as their clients.

3. The number and complexity of annuities confuse clients — and many advisors.

4. Advisors need to pick the right annuity for the client, not the least expensive option.

5. Adoption of annuities in DC plans is growing slowly — for now.

6. Advisors need to understand clients' preferences first, then become clear on annuity solutions.

U.S. Mortality Is Still High — And It's Not Just COVID

The Advisor's Guide to Overcoming Prospecting Excuses

9 Traps to Avoid With Planning Tools: CFP Board

33 Cheap Stocks to Buy in Q2: Morningstar

Featured Resources

Candid Conversations: Couples, Money & Conflict

Helping Your Clients Make a Greater Philanthropic Impact

Navigating the Choice of Indexed Annuities

Field Guide: Your Roadmap to Integrating Guaranteed Lifetime Income

6 Roadblocks Holding Advisors, Clients Back From Annuities

Share with Email

Thank you for sharing!

What You Need to Know

More on this topic

1. The shift toward defined contribution plans means many investors don’t understand what’s in their portfolio.

2. Advisors are not on same page as their clients.

3. The number and complexity of annuities confuse clients — and many advisors.

4. Advisors need to pick the right annuity for the client, not the least expensive option.

5. Adoption of annuities in DC plans is growing slowly — for now.

6. Advisors need to understand clients' preferences first, then become clear on annuity solutions.

Featured Resources

Connect with ThinkAdvisor