Americans in defined contribution plans live in fear of outlasting their retirement savings. Mindful of that worry, plan providers have swooped in with a slew of annuity-combined products. Guaranteed minimum withdrawal benefit (GMWB) and guaranteed lifetime withdrawal benefit (GLWB) annuities are just two examples of offerings that asset managers can match with target date and other plans. These annuities share features that should appeal to employers with defined contribution plans; they promise participants account-balance security and reliable monthly retirement income without a return to the era of defined benefits. “All are in effect, guarantees, for a fee, that the client can withdraw annually for a lifetime, regardless of market performance, even if the account value is exhausted,” says Stephen Utkus, Denver-based director of the Vanguard Center for Retirement Research.
Too bad plan sponsors aren’t biting. In consulting firm Aon Hewitt’s latest survey of employers that offer defined contribution plans, 90 percent of the 546 respondents had no annuity or insurance products within their retirement plans and didn’t intend to add them in 2011. Asked if they would offer such add-ons as out-of-plan options, though, only 78 percent said no.
Sponsors have good reason to keep their distance. “If it’s an in-plan option, it’s permanently linked back to the plan,” Utkus explains. It’s expensive to fight even an unsuccessful claim that a plan didn’t deliver on its promises. “It’s hindered adoption among some employers,” Utkus says of the legal vulnerability.
Plan providers know that annuities are a tough sell. “We’re waiting to see more adoption on the part of other plan sponsors,” says Srinivas Reddy, senior vice president of institutional income for Prudential Retirement in Newark, New Jersey. In October, Reddy’s firm expanded its Prudential IncomeFlex Target, an income-guarantee product for defined contribution sponsors, by adding target date offerings from fund managers T. Rowe Price and Vanguard Group.
Reddy contends that at all of the 25-plus industry events with large- and medium-size plan sponsors he attended in 2011, guaranteed or permanent income was a hot topic. “It’s very much front of mind,” he says. “I think they’re still waiting to see what other plan sponsors do.”
Plan providers usually pair with insurance carriers for guaranteed-income products. This partnership makes perfect sense: Asset managers are forbidden to guarantee results and insurers can’t trade securities, but the latter specialize in paying out preset amounts through life insurance policies. In a typical arrangement, as part of its LifePath Retirement Income program, New York–based BlackRock has teamed up with Metropolitan Life Insurance Co. BlackRock’s target-date-fund clients have the option of using money otherwise earmarked for fixed-income investments to buy an annuity from the insurer.
In October, Valley Forge, Pennsylvania–based Vanguard started offering a GLWB feature as part of its Vanguard Variable Annuity, issued by Monumental Life Insurance Co. of Cedar Rapids, Iowa. As the Vanguard Center’s Utkus notes, the main difference between a traditional and a variable annuity is that with the latter, clients retain access to their principal in exchange for higher fees. And they can stop taking withdrawals without a penalty.
Annuities have always been among the most complex forms of investment, and bundling them with target date funds hasn’t made things any simpler. Plan expenses, for example, rise with the amount of risk the insurer takes on. Vanguard’s GLWB, which is only available outside a defined contribution plan for individual retirement accounts and taxable money, costs 95 basis points on top of the plan and annuity fees, for a total annual fee of about 1.5 percent.
“Most goes to pay for plans and protect the portfolio against stock and bond fluctuations,” Utkus says.
Too bad plan sponsors aren’t biting. In consulting firm Aon Hewitt’s latest survey of employers that offer defined contribution plans, 90 percent of the 546 respondents had no annuity or insurance products within their retirement plans and didn’t intend to add them in 2011. Asked if they would offer such add-ons as out-of-plan options, though, only 78 percent said no.
Sponsors have good reason to keep their distance. “If it’s an in-plan option, it’s permanently linked back to the plan,” Utkus explains. It’s expensive to fight even an unsuccessful claim that a plan didn’t deliver on its promises. “It’s hindered adoption among some employers,” Utkus says of the legal vulnerability.
Plan providers know that annuities are a tough sell. “We’re waiting to see more adoption on the part of other plan sponsors,” says Srinivas Reddy, senior vice president of institutional income for Prudential Retirement in Newark, New Jersey. In October, Reddy’s firm expanded its Prudential IncomeFlex Target, an income-guarantee product for defined contribution sponsors, by adding target date offerings from fund managers T. Rowe Price and Vanguard Group.
Reddy contends that at all of the 25-plus industry events with large- and medium-size plan sponsors he attended in 2011, guaranteed or permanent income was a hot topic. “It’s very much front of mind,” he says. “I think they’re still waiting to see what other plan sponsors do.”
Plan providers usually pair with insurance carriers for guaranteed-income products. This partnership makes perfect sense: Asset managers are forbidden to guarantee results and insurers can’t trade securities, but the latter specialize in paying out preset amounts through life insurance policies. In a typical arrangement, as part of its LifePath Retirement Income program, New York–based BlackRock has teamed up with Metropolitan Life Insurance Co. BlackRock’s target-date-fund clients have the option of using money otherwise earmarked for fixed-income investments to buy an annuity from the insurer.
In October, Valley Forge, Pennsylvania–based Vanguard started offering a GLWB feature as part of its Vanguard Variable Annuity, issued by Monumental Life Insurance Co. of Cedar Rapids, Iowa. As the Vanguard Center’s Utkus notes, the main difference between a traditional and a variable annuity is that with the latter, clients retain access to their principal in exchange for higher fees. And they can stop taking withdrawals without a penalty.
Annuities have always been among the most complex forms of investment, and bundling them with target date funds hasn’t made things any simpler. Plan expenses, for example, rise with the amount of risk the insurer takes on. Vanguard’s GLWB, which is only available outside a defined contribution plan for individual retirement accounts and taxable money, costs 95 basis points on top of the plan and annuity fees, for a total annual fee of about 1.5 percent.
“Most goes to pay for plans and protect the portfolio against stock and bond fluctuations,” Utkus says.
