Lifetime-Guaranteed Income: Where Does It Belong?
An in-plan annuity (IPA) is a feature within a defined contribution (DC) retirement savings plan that allows participants to generate guaranteed-income payments during retirement. Annuities have long been embedded in DC plans, such as 403(b)(1) plans, and group annuities have been used as the funding mechanism for 401(k) plans. However, within the past several years, the industry has focused on bringing IPAs to the $6.9 trillion 401(k) market. Most — as many as 9 in 10 — 401(k) plans have no in-plan option for generating lifetime-guaranteed income for retiring employees.
Despite the historically low adoption of IPAs to date in 401(k) plans — in 2019, just 14 percent of savings and thrift plan participants in private-sector jobs worked for employers who offer this option — the market is evolving. Some stakeholders are seeing an uptick in adoption, and others have recently introduced new products, according to a National Compensation Survey by the U.S. Department of Labor. These developments have in part been spurred by the enactment of the SECURE Act of 2019 and the SECURE 2.0 Act of 2022, which provided plan sponsors with a safe harbor to select an insurance company’s in-plan product. Combined with advances in technology and product design innovations, LIMRA expects the in-plan annuity opportunity to grow rapidly over the next few years.
Much of the discussion and speculation on how this nascent market will expand has centered on the IPA products themselves — how to make them less expensive, less complicated, more portable and more flexible — among other factors. There is certainly room for further product innovation, and more entrants into the market will increase competitive pressures to further improve these products. But the success of IPAs also depends on the attitudes and beliefs of stakeholders, including employers, advisors and participants, about the best ways to produce retirement income. The critical questions revolve around determining who should take responsibility for helping participants convert their balances into a reliable retirement income stream and whether a DC plan is the optimal avenue for accessing income products.
Views of Advisors and Sponsors
In two recent studies, LIMRA examined the perspectives of plan advisors and plan sponsors concerning in-plan income options. Plan advisor results were based on an online survey of 132 financial advisors who advise DC plans; the survey was fielded in October 2022. Plan sponsor results were based on an online survey of 556 employers who offer DC plans and was fielded in mid-2023.
When asked which stakeholders bore responsibility for helping plan participants convert balances into income, advisors — including both those working directly with individuals and with the plan itself — are the most often mentioned (Figure 1). Both advisors and sponsors acknowledge that the complexity of retirement income planning requires an in-depth, comprehensive approach and often necessitates the expertise of financial professionals. However, opinions diverge on the roles insurers, sponsors, IRA providers and plan recordkeepers should play.
Sponsors tend to consider this responsibility as broadly shared, whereas advisors perceive it as more narrowly borne by advisors and, to a lesser extent, the insurers who manufacture income products. Furthermore, DC plan sponsors offering IPAs are slightly less likely to believe personal advisors have “high” levels of responsibility, compared to DC plan sponsors without IPAs; these employers are more inclined to believe the responsibility lies outside of the employer and the employer’s partners, such as plan advisors and recordkeepers.
Figure 1 — Who Has “High” Level of Responsibility for Helping Participants Turn Retirement Plan Balances into Income Stream?
Based on 132 plan advisors, 209 sponsors of plans with IPAs and 357 sponsors of plans without IPAs. Multiple responses allowed. Respondents were asked to indicate whether each stakeholder had a “high,” “medium” or “low” level of responsibility.
Plan advisors and sponsors also hold different views on the best place to access income products. Two- thirds of advisors believe the ideal place is a rollover IRA, while fewer than one quarter of sponsors share this perspective.
A majority of sponsors instead believe that an employer’s DC plan is the best location for retirement income products. While 94 percent of advisors believe that an investor should have a minimum level of assets before contributing to any retirement income product, only 77 percent of DC plan sponsors with IPAs feel plan participants need a minimum balance before investing in an IPA.
These and other findings from the studies demonstrate that plan advisors are generally more circumspect about IPAs. They emphasize that the responsibility for generating retirement income ultimately rests with individuals and financial professionals guiding them. As part of that attitude, they believe the best location for generating income is outside of plans, in rollover IRAs. They are more restrictive regarding which kinds of investors should contribute to an IPA. It appears that advisors will need to be much more familiar and comfortable with IPAs before recommending them to their sponsor clients. Conversely, plan sponsors agree with advisors that the primary responsibility for generating retirement income mainly rests with financial professionals rather than employers. However, they advocate for the DC plan as the preferred platform for income generation, and they are less restrictive about the types of investors who should contribute to an IPA.
For the IPA industry to thrive, these disparate yet legitimate perspectives must be reconciled. This process will take time, as stakeholders learn more about these products and examine their track records. Key to this progression is segmentation of the plan sponsor and plan participant populations, based on their level of fit to IPAs. With more experience, guidelines can be established that will enable more selective IPA implementation and enrollment. As the need for lifetime-guaranteed income continues to grow, connecting Americans to the appropriate solutions — wherever they may be located — will be the industry’s central challenge.