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Sri Reddy. Credit: Principal

Life Health > Annuities

In-Plan Annuity Uptake May Still Depend on Advice: Sri Reddy

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What You Need to Know

  • Some predict that in-plan annuities will be huge.
  • Getting workers to take up anything optional may be difficult.
  • Older in-plan annuitization options had takeup rates under 5%.

Combining a plain vanilla default investment strategy with a plain vanilla annuitization option might sound great to advisors.

But Sri Reddy, a senior vice president at Principal Financial Group, says that advisors are different from the participants in a typical 401(k) plan.

With a typical 401(k), persuading participants to make active choices about an income option is difficult, Reddy said in a recent interview.

“Unless you make it a default, you get limited uptake,” Reddy said.

What it means: Even when an employer offers an annuity option that’s almost a default option, getting employees to make an active choice may take an active effort to give the employees personalized advice.

QDIA history: Many employers once offered employer-managed defined benefit pension plans.

As regulators began making employers take their pension promises seriously, and once employers began to understand how difficult it was to make good on promises based on mortality and investment assumptions that might extend 80 years or more, employers began to replace pension plans with defined contribution plans, which provided retirement cash without income promises.

In recent years, employers have responded to the participants’ confusion about investments by adding “qualified default investment alternatives,” which, in most cases, have turned out to be target-date funds, or investment funds designed to tilt more toward relatively low-risk assets as participants within a given age range get closer to their anticipated retirement.

A QDIA sibling: Some defined contribution plans funded by a group variable annuity contract always provided a built-in tool for converting part or all of the assets into a stream of lifetime income.

But typical plan sponsors provided no annuitization option. They assumed that workers would convert their retirement plan assets into streams of income by taking a little cash out every month, or by buying individual annuities.

Many participants have not been sure how to do that. Regulators have argued that many retirees who buy individual annuities end up paying high sales commissions for mediocre annuities, or, sometimes, paying cash to con artists who simply run off with it.

Now, financial services companies are trying to address retiring workers’ confusion about how to tap their nest eggs by offering in-plan annuitization options.

They are using provisions in the Setting Every Community Up for Retirement Enhancement Act of 2019 — the Secure Act — and the act’s 2022 sequel, Secure 2.0, that make it simpler, cheaper and less risky for retirement plans to offer in-plan annuitization options.

Larry Fink, the CEO of BlackRock, has predicted that packages of target-date funds with in-plan annuities will become the most popular defined contribution investment strategy.

Principal’s experience: Principal, a Des Moines, Iowa-based life insurer and asset manager, ended the first half of the year with $1.6 trillion in assets under administration, including $699 billion in assets under management.

Its Workplace Savings and Retirement Solutions business was managing $463 billion in assets for 11 million participants in 40,000 defined contribution retirement plans and $18 billion in assets for 418,000 participants in 1,700 defined benefit plans.

The company has offered employers access to an in-plan annuity option for about 10 years, Reddy said.

Principal offers access to an online system that offers automated, personalized retirement planning advice.

In the real world, Principal has found that uptake for its in-plan annuitization options has tended to range from 3% to 5%, Reddy said.

Some participants are aware of all of their plan options and concerned enough about investment risk to want an income guarantee, he said.

Working with a dedicated advisor could help, but “the vast majority of the population doesn’t work with an advisor,” Reddy said.

Using the automated advice system could also help, but uptake has been lower than Principal had hoped, Reddy reported.

Given many workers’ lack of awareness, lack of time or lack of interest, the last time they make a retirement plan investment allocation decision is often the day they sign up for the retirement plan, Reddy said.

“They set it and forget it,” Reddy said.


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