When Smithfield Foods decided to start offering an
annuity option in 2006 for the 15,000 participants in its
three defined contribution plans, Corporate Benefits
Manager Mary Fisher worried about employees'
reaction.
The Smithfield, Virginia-based company, which
describes itself as the world's largest pork
processor and hog producer, had decided to go with
Genworth Financial Inc.'s ClearCourse group variable
annuity.
"We just felt that people needed to be better
prepared. We all do education on how to save, but there
is very little education on, when they get to retirement,
how to make it last," Fisher says. "[Offering
an annuity] gives them an opportunity to create a
mini-pension plan within the 401(k)," she
says.
Smithfield Foods did not want a strictly fixed or
strictly variable annuity, Fisher says, and liked
ClearCourse's combination of a guaranteed income and
upside potential. "My biggest concern was, how are we
going to educate them?" she says. "Yet, as soon as we
said there was a bottom-line guarantee, their ears perked
up and they really listened. We had comments like, 'That
is a no-brainer. Why wouldn't you want it?'"
ClearCourse also gives participants more options
than retirement-income products traditionally have,
Fisher says. "They get to choose how much they put in,
and when they leave the company or retire, they get to
choose whether they want to keep the annuity," she says.
"It has flexibility all along."
Since the June 2006 introduction, 2,500 to 3,000
participants have opted for the annuity, and Fisher
thinks an annuity's comfort factor also explains the 10%
jump in overall participation the company has seen during
that time. "Some of them were afraid to put money in the
401(k), because they were scared that they could lose
money in the market," she says. "[The guaranteed income]
gave them a huge sense of comfort," she adds.
A growing number of plan sponsors are taking a
fresh look at retirement-income products and finding a
new generation of -offerings more tailored to 401(k)
participants' logistical wants and psychological
needs.
"There are lots of features coming out that help
people get over their reluctance," says Scott Demonte,
Director of Variable Annuities at Boston-based Financial
Research Corp. "As we see people go from the accumulation
phase to the distribution phase, we see variable
annuities pick up quite a bit." Annuity sales in general
will likely increase, he says, but those variable
annuities that offer guaranteed income plus upside
potential appear poised for the most growth.
With Americans increasingly depending on defined
contribution plans to fund their retirement, "the need is
there, and there is reason to think that there will be
growth," says Matt Greenwald, President and CEO of market
researcher Mathew Greenwald & Associates, Inc. "The
products are getting better. The ideas that are
percolating include things like guaranteed minimum
monthly payments for life."
While defined benefit plans have long featured
these guaranteed payments, he says, they are new to the
defined contribution world.
"Percolating" nicely describes the current market
for retirement-income products aimed at 401(k)
participants. "There is a lot of curiosity and interest,
but I am not sure there is a lot of uptake yet," says
David Macchia, President and CEO of Hingham,
Massachusetts-based Wealth 2k and a Director of the
Retirement Income Industry Association.
"[Sponsors] are trying to figure out what is
the best approach," says Bill McClain, a Seattle-based
principal at Mercer Human Resource Consulting. "We are
getting to the point where a lot of people will be
retiring with sizeable balances. There needs to be
education about: 'Now that I have the money, what do I do
with it?'"
A Change in Conventional Wisdom
For some defined contribution plan participants,
going the annuity route has felt more like gambling than
getting insurance.
"My gut feeling is that there is a psychological
reluctance to hand over control of one's wealth that one
has spent a lifetime accumulating," says Anthony Webb, a
research economist at the Center for Retirement Research
at Boston College.
Macchia is asked what needs to change for the
take-up rates to improve. "To some extent, acceptance of
annuities is a communications rather than a product
challenge," he says. "Their value must be conveyed in a
manner that breaks through negative, preconceived
perceptions. In terms of helping participants who might
select annuity options, that implies the need to create
context to help them understand where annuities protect
and strengthen retirement."
Sponsors need to incorporate more nonbiased
education about annu-ities into their 401(k)
communications, says Kelli Hueler, CEO of
Minneapolis-based Hueler Companies. "Until that
information is squarely front and center—until this is a
part of normal, everyday communications—the take-up rate
will not reflect the need," she says. "Plan sponsors need
to recognize that there are wolves out there preying on
people who walk out the door with a check in their hand.
Employers can drastically improve the quality of life
that individuals can have in retirement by encouraging
them to purchase institutionally priced
annuities."
Products need to change, too. So, providers have
started coming up with products structured specifically
for the 401(k) market and reflecting those realities.
"Individuals need to have something they are comfortable
with adopting. We are seeing new solutions that take care
of some of the needs around issues of transparency, cost,
and complexity," says Mark Foley, a Vice President at
Prudential Retirement. For retirement-income products to
make major headway, he says, "What needs to change is
trying to shove a square peg in a round hole."
Most 401(k) efforts traditionally have focused on
getting people to join the plan, save more, and allocate
assets better, says Fred Conley, President of the
Institutional Retirement Group at Genworth.
"There is beginning to be a focus on income, rather
than on the account balance. Participants are wondering,
'How can I make sure that I have a paycheck in retirement
that does not run out?'" he says. "It is almost like a
change in the conventional wisdom, and it takes a little
time for that to work its way out there."
"It used to be accumulate, accumulate, accumulate,"
says Joe Reddy, Director of Wachovia Retirement Services.
"I call it this fundamental shift from a focus on
accumulation to a focus on retirement security."