TIAA Exec: Put Deferred Fixed Annuities in 401(k) Plans

Many investment strategists believe in using annuities for retirement savings held outside 401(k) plans.

Phil Maffei II, the managing director at TIAA’s corporate retirement solutions unit, disagrees.

Putting some retirement plan assets in deferred fixed annuities “can benefit participants at all stages of their lives,” Maffei said in a recent email interview.

The insurer that backs the annuity can protect a participant’s principal, guarantee asset growth, stabilize portfolio returns, and provide a lifetime income option — and those benefits are worth the cost, Maffei added.

What It Means

Ordinary retail annuities are hot, and insurers are busy persuading 401(k) plan sponsors to add in-plan annuitization options, to help participants who retire pull out retirement income.

Soon, marketers may focus more on the idea that in-plan annuities can also be helpful for plan participants who are still accumulating retirement assets.

The History

Some of the first modern defined contribution retirement plans in the U.S., or 403(b) plans, had annuities at their heart. Many universities, K-12 schools and other nonprofit employers still offer annuity-based 403(b) plans.

Today, most for-profit employers with 401(k) plans use bare mutual funds on the investment menus, not annuities, because of a belief that annuity owners pay extra for account management machinery and tax advantages that are built into the 401(k) plan framework.

In 2019, Congress supported the increased use of annuities as 401(k) plan retirement income spigots by passing the Setting Every Community Up for Retirement Enhancement Act, or Secure Act. One provision reduces the risk that employers could get sued for picking a poorly performing annuitization option provider.

Deferred Fixed Annuities

A deferred fixed annuity (DFA) provides a minimum guaranteed rate of interest. Features tied to the performance of investment indexes or other features can increase the actual crediting rate paid above the minimum rate promised.

“These types of plan investments do not lose value,” Maffei said. “The value increases every single day, irrespective of what’s happening in the stock and bond markets.”

Retirement plans and individual workers can also use money market funds, bank certificates of deposit and stable value funds to cope with investment market volatility and provide income in retirement.

But, “oftentimes, a DFA can provide a better long-term return profile than either stable value funds or money market funds,” Maffei said. “In addition, activating the lifetime income feature at retirement can provide a competitive amount of lifetime income, because of the risk pooling that sits behind all insurance.”

Because a deferred fixed annuity is so much more efficient than a money market fund at providing guaranteed income, a worker with a DFA can invest a higher percentage of assets in stocks and stock funds, Maffei said.

The Reality Check

The investment strategists who bring out the garlic when they hear the word “annuity” reject the idea that the value of annuity guarantees is high enough in enough scenarios to justify putting annuities in retirement plans.

From Maffei’s perspective, the peace of mind annuity guarantees provide is priceless in almost any scenario.

He suggested that the list of concerns to consider when adding a deferred fixed annuity to a retirement plan is similar to the list of concerns for any annuity transaction, or any retirement plan investment menu decision.

“Be sure to understand any liquidity lockups or surrender charges,” Maffei said. “For products with discrete fees, do the appropriate comparison.”

For products without discrete fees, such as group fixed annuities, “compare products based on crediting rate levels, contract features, insurer’s financial strength as well as their history and commitment to this space,” Maffei said.

Phil Maffei II. Credit: TIAA