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Retirement Planning > Retirement Investing > Annuity Investing

Will Fidelity Steal Advisors’ Rollover Lunch?

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What You Need to Know

  • Fidelity, the biggest DC plan recordkeeper, is developing an annuity platform for 401(k) assets.
  • Advisors foresee more qualified money staying ‘in-plan’ as recordkeepers provide greater access to institutionally priced annuities, potentially impacting the pace of rollovers.
  • Sources say wealth managers must step up their income planning capabilities to meet emerging competitive pressures.

Financial advisors who work with institutional retirement plans know the U.S. defined contribution plan industry has grown terrifically over the past several decades.

A commonly cited statistic from the Investment Company Institute shows defined contribution plan assets were approaching $10 trillion as of the start of this year. That number, which reflects assets held in 401(k)s, 403(b)s and various other types of employer-sponsored DC plans, has likely fallen with the recent market volatility, but the DC world remains gigantic nonetheless.

Retirement-focused advisors also know that, in the large and growing DC plan industry, a lone provider stands head and shoulders above the rest in terms of the simple scale of its operations: Fidelity.

One retirement industry survey pins Fidelity’s 401(k) plan assets at some $2.8 trillion, which is well in excess of double its closest competitor, Empower, which stewards $1.1 trillion in 401(k) plan assets. Vying for a distant third position are Vanguard, with $569 billion, and Alight Solutions, with $527 billion.

Fidelity’s sheer size is a big part of the reason why the firm’s ongoing development of a DC plan annuitization platform called Guaranteed Income Direct is making some waves across the insurance, retirement planning and wealth management industries, says Gary Mettler, the self-styled “annuity maestro.”

Income-focused planning professionals like Mettler are debating the meaning of Fidelity’s move in public forums like LinkedIn, and sources say they are also having private discussions with industry peers about the potential for Fidelity’s platform to disrupt the income planning status quo.

Sources say the move by Fidelity portends better, cheaper lifetime income options for workers, but they also warn of potential threats to advisors’ rollover business, especially if they don’t step up their income planning game.

In a discussion with ThinkAdvisor, Metter called the forthcoming launch of Guaranteed Income Direct “one of the most exciting moves in the immediate annuity space in a long time.” He says disruption to the annuity status quo is all but certain, and that advisors will have to adjust to a new competitive landscape.

An ‘Authoritative Endorsement’ for Income Annuities

“In 2023, the 800-pound gorilla Fidelity will be flooding the airwaves regarding their platform services and providing immediate annuities for retirement financing,” Metter says. “For me, this is a reaffirmation of my long-held beliefs that immediate annuities remain the safest and most reliable form of guaranteed lifetime income.”

Metter says he and other professionals have been making such an argument for the better part of 40 years. In Metter’s case, he even wrote a book that sings the praises of SPIAs, or single premium immediate annuities, which he calls the “king” of retirement income insurance solutions.

“Now, an authoritative source like Fidelity gets behind the boulder, with real financial firepower, for the push up the hill,” Metter says.

Metter expects Fidelity’s platform to help many people achieve better income security in retirement, but like others, he has some questions about how the platform will work in practice, as there is nothing simple about the structuring, pricing and issuance of mass market insurance products.

For example, Metter says he wants to know how Fidelity is going to structure and title the annuity contracts, and whether the solution will function by creating de facto individual retirement accounts for annuity purchasers or by some other mechanism.

In an early October interview with ThinkAdvisor, Fidelity’s Keri Dogan said the platform would prioritize simplicity, transparency and low pricing, and she emphasized the sizable and growing demand for income-oriented solutions among DC plan investors. Today there are some 8 million workers utilizing Fidelity’s workplace savings platform who are nearing retirement, and that number is expected to grow significantly in the future.

More of the operational details will presumably emerge in time, Metter says, while other “interesting” information may not, such as exactly how insurance carriers negotiate to secure access to Fidelity’s platform and clients – and exactly what type of compensation arrangements may be involved.

At this stage, Metter says, one thing is clear: “Fidelity’s push is going to float a lot of immediate annuity distribution boats.” It is also highly likely, in Metter’s and others’ view, that the likes of Empower, Vanguard, Alight and others will follow in this direction in the near future.

Threat to Rollovers?

David Macchia, an author and entrepreneur who founded Wealth2k Inc., which provides planning-based retirement income solutions, agrees with much of Metter’s take. He tells ThinkAdvisor that all wealth advisors whose business depends in some part on securing rollovers from retirement plans must take note of what is happening.

“This is a big move by Fidelity Investments that holds the potential to shake up the rollover business, something that, I assume, weighed heavily in Fidelity’s thinking,” Macchia says. “Up to 100% of plan assets may be annuitized through Fidelity, with institutional SPIA pricing for the annuitant. That is going to be difficult to compete with.”

Macchia notes that many wealth management clients have substantial money invested outside of DC plans that is not going to be directly impacted by this development. But, on the other hand, Americans have more money than ever saved in DC plans.

If the likes of Fidelity and others can create a compelling value proposition for investors to stay on their platforms, for example by offering them simplified access low-priced SPIAs that are managed in a fiduciary capacity, this could have a substantial impact on the pace and scale of rollovers.

Like Metter, Macchia predicts that the other leading retirement plan recordkeepers can be expected to move in a similar direction. For his part, Macchia says the RIA community is destined to lose clients and assets if they do not address what he calls a “widespread lack of expertise in retirement income planning.”

“In my opinion, no wealth advisor can be sanguine about this development,” Macchia says. “It is a bigger development than people realize. Frankly, those RIAs who continue to refuse to address longevity risk deserve to lose every last dollar of their constrained investor clients’ retirement assets.”

Macchia says traditional wealth advisors, if they want to protect their rollover businesses in the coming environment, are going to have to become much more capable as genuine income planners.

“The challenge with being a skilled income planner is that you can’t be just one thing,” Macchia warns. “You can’t just be an investment person. You can’t just be an insurance-focused person. Your solution has to be holistic and cut across the board, and it has to be worth the fee charged to clients. That’s why it has been so difficult for these services to scale up efficiently.”

Debate About Capacity Issues

One area where Metter’s and Macchia’s expectations differ is in terms of whether, and how, Fidelity and the rest of the major recordkeepers will be able to source the annuity contract capacity their solutions may eventually need.

Metter says the SPIA marketplace is sizable, but in his experience, there are few carriers today that process more that $1 billion in annual SPIA premiums. His understanding is that SPIA premiums for 2021 totaled some $6.4 billion across both qualified and nonqualified assets.

“With structured settlements in the range of $4.2 billion in 2021, that’s about $10.5 billion total,” Metter says. “In my opinion there is a possibility of capital strain that could raise premiums.”

Macchia and others are less concerned about this possibility.

“I don’t think capacity will be a problem, personally,” Macchia says. “Fidelity and the insurance carriers have the scale to pull this off and make it durable, in my view. Again, their scale is a big part of the point. They will have an inherent advantage compared with the costs associated with distribution in the traditional channels. It will impossible to compete on price alone.”


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