DC Plan Sponsors Want to Add Annuities — But They Face Hurdles

While employers say they want to add annuities to the mix available to defined contribution participants, they are concerned about potential lawsuits.

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Illustration by II

Americans, who are increasingly concerned that the Social Security system will run out of money, are hoping their employers will add retirement income options to their 401(k) plans.

Annuities, backed by insurance companies, allow individuals to receive a guaranteed stream of payments during retirement in exchange for a lump sum.

About 82 percent of working Americans who already participate in a retirement plan say they would tap an “income solution” — typically an annuity plan — if they were offered the option, according to a new survey from Schroders.

The Schroders 2023 U.S. Retirement Survey was completed in partnership with 8 Acre Perspective, which polled 2,000 individual investors aged 27 to 79, with a median household income of $75,000. The survey was conducted in February and March 2023, and was published on Tuesday.

The survey shows that many Americans who have not yet retired plan to take their social security payments before they turn 70. If Americans wait until 70 to take payments, they receive their full retirement check, while tapping benefits earlier results in a lower payout.

But 44 percent of respondents said they were worried that Social Security may run out of money and stop making payments altogether, which is why they would choose to tap the program early.

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While corporate plan sponsors say they want to add annuities to the mix available to plan participants, they are concerned about potential legal recourse should these strategies underperform. “There’s great fear of being sued later,” one corporate investment chief told Institutional Investor. They asked to remain anonymous given legal concerns.

II previously covered some of these lawsuits targeting defined contribution plans.

“One plan may not pay out as much as another one,” the allocator said. “A lawsuit for lack of process is perfectly fine, but one filed for lack of perfection in selecting the exact fund with the best performance is not. That scares plan sponsors from even dipping their toes in the water.”

Despite this trepidation, it is likely that Americans will get guaranteed income options from their employers’ plans, rather than directly from the market.

“Americans are increasingly looking to their employers for insights and solutions to their retirement income challenges,” said Deb Boyden, head of U.S. defined contribution at Schroders, in a statement.

“While this has been a topic of conversation for some time, we believe we are entering a phase of accelerated adoption among plan sponsors for solutions to meet these challenges,” Boyden said. Products that provide lifetime income address sequence of return risk with principal protection, and “give investors the flexibility to take the income when they want or need it,” she added.

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