By now, almost everyone from U.S. Vice President Joe Biden to major insurance companies and money management firms has been promoting annuity-type products within defined contribution plans as the answer to the nations eroding pension system.
But after more than two years, the full-court press has produced negligible results, attracting less than 2 percent of defined contribution assets, admits Jamie Kalamarides, senior vice president of institutional investments at Prudential Retirement, one of the biggest vendors of these so-called lifetime income products.
What are plan sponsors and employees waiting for? More oomph from Washington, say Kalamarides and other supporters. Some advocates also acknowledge that the products are hurt by annuities historically poor image as expensive and inflexible. But they say they are not giving up, even if takes years.
Theres nothing to say we need to throw in the towel on this, insists Chip Castille, head of the U.S. and Canadian defined contribution group at BlackRock, which sells a product that melds an annuity into the asset allocation of a set of target-date funds. He says it took about ten years, from 1993 to 2003, for target-date funds to catch on, and now 63 percent of participants use them or similar premixed products, according to the consulting firm Aon Hewitt. For annuity products, Castille says, the clock started ticking in 2008, when the current generation of offerings came into the market.
Not, he quickly adds, that he will automatically throw in the towel on annuity products in 2018.
Of course, participants have long been able to take their 401(k) nest egg at retirement and simply buy an annuity from an insurance company, which will pay them a set amount every month for the rest of their lives. What makes these new versions different is that they are an investment option within the 401(k) menu, selected while people are still working. Furthermore, they are not just offered by themselves, but combined with other vehicles or a series of annuities in a dizzying array of variations. Their main advantage is that, like the much-lamented traditional pension, an annuity pays you for life, Castille says.
Advocates say that for these products to succeed in a big way, they need to be a default option when plans automatically enroll new hires. Although the Treasury Department in February proposed some easing of regulations, that dealt mainly with the more traditional approach of buying an annuity at retirement. Treasury didnt spell out magic words such as: If you follow this process, and you pick an income solution, you wont be held liable if the insurance company implodes in 15 years, says Alison Borland, Aon Hewitts vice president of product strategy.
Kalamarides cites four more sets of regulations that the Treasury and Labor departments are supposedly working on, for disclosure, education, fiduciary guidelines, and other technical guidance.
But the government isnt the only stumbling block. Annuities have a bad public image, which the fancy new names dont seem to have burnished. Security costs money typically, 35 to 175 basis points extra per year for these products. Most have static payout rates that dont protect against inflation, although BlackRock tries to solve that by building in cost-of-living increases. Kalamarides says Prudential Retirements offering alleviates one big concern inflexibility because retirees can withdraw 5 percent of their assets per year.
According to Borland, a half-dozen large plan sponsors are avoiding the insurance label by extending their managed accounts into nonguaranteed, postretirement managed drawdowns, where the provider juggles the assets in a way that the participants can feel confident that theyll have a steady stream of payments until around age 80, after which they can buy a traditional annuity.
But all those frills only add to another problem, complexity. People are confused as to what its insuring against, Castille says.
And the biggest issue of all, says Kevin OFee, a vice president of defined contribution product management at Fidelity Investments, is low account balances. Noting that the average defined contribution account has just $70,000, he says, You can have all the guarantees in the world, but guaranteeing a small balance isnt going to make a difference. Fidelity, of course, would prefer that participants roll over their 401(k) portfolios small or not into an individual retirement account, adding to the $663 billion in IRAs managed by the money management giant. Then Fidelity can suggest a traditional annuity to buy.
Castille insists everybodys expectation is that these income products are going to find a place over time. And if 401(k) plans dont offer them, he says, people will buy the products retail.