Providers seeking to make
products more affordable and flexible for 401(k)
participants
"It is important that annuities are available to
people who are retiring," says David Wray, president
of the Profit Sharing/401(k) Council of America, "but I do
not think that the cost-benefit analysis justifies having
annuities in a 401(k) plan."
First, Wray says, the fiduciary decision on annuities
carries with it an unusual and very high benchmark, the
"safest annuity" standard. "Normally, a fiduciary in a
defined contribution plan has to go through a 'prudent'
decisionmaking process, but there is no tie to the
results," Wray says. "When you have to have the 'safest'
annuity, that is not a process; that is an outcome. We have
gone from a process-based standard to a result-based
standard. The fiduciary liability is substantially
higher."
Second, Wray says, the federal government has stringent
rules for employers about things like communicating with
employees about annuities offered through a plan. "If you
do not follow them precisely, the IRS can fine you," he
says. "There have been companies, acting in good faith to
communicate with employees, that have been fined by the IRS
or put through the wringer."
Then, given those two realities, there is the kicker.
"Virtually no employees choose annuities when they are
offered," Wray says. "Most people do not want to take 100%
of their retirement savings on day one when they retire and
put it into an inflexible program. It leads you into a
certain financial situation for the rest of your life.
People's situations are very different, and annuities are
very generic."
The upshot, says Wray: "Clearly, people need new
alternatives as they move through the straight-out
accumulation phase to the payout phase." Several companies
are trying to address that need, and this story looks at
three examples.
Employers including IBM Corp. have been drawn to the
annuity marketplace created by Minneapolis-based Hueler
Companies, Inc. Participants input some basic information
about themselves, and get back price quotes from the
companies bidding for the business as well as details on
each provider's terms. They can buy annuities in increments
over time rather than all at once if they want.
Hueler President Kelli Hueler saw the flaws in the
annuity market as it had existed. "The reason that
annuitization-takeup rates have been so low is because of
the lousy way they have been offered," she says. "It is all
or nothing, take the cash or annuitize it. They take the
cash, and then they end up in the retail market for
annuities. So, they get lousy pricing."
Navigating the annuity market on your own is hard, due
to rapidly changing prices and the product's complexity.
The insurance company that offered the best price yesterday
might be at the median or below today, Hueler says. "You
cannot go to one or two issuers and negotiate a best-price
contract and be assured that it is truly the best price,"
she says.
Hueler started offering the marketplace in cooperation
with Hewitt Associates LLC in fall 2004. Now there are
eight insurance companies on the platform, and Hueler can
do the offering directly with sponsors or through a 401(k)
service provider. More than 60 employers currently use the
platform for their participants, she says, adding that it
can be utilized by any sponsor and not just those that have
an annuity feature within their plan. Providers do not pay
to be on the platform, she says; the company makes its
money from the flat fee that participants pay. Hueler now
works with CitiStreet in addition to Hewitt, she says, and
expects to announce other new ties in 2006.
"The Hueler model whacks the price down a long way, and
it is totally flexible," Wray says. As for whether it
solves the fiduciary-liability problem, he says, "That is a
gray area. It is not a settled issue."
Meanwhile, Wray says, insurers are coming up with their
own new ideas. "When 99% of people are not buying a
product, the product needs reworking," he says, "and the
insurance companies are reworking their products. In the
next few months, we will see lots of new ideas."
Why have so few 401(k) participants opted for annuities
offered by insurers up to now? "People do not make
decisions the way they are being asked to make decisions
with annuities now," says Spencer Williams, senior vice
president of the income management group at MassMutual
Financial Group in Springfield, Massachusetts. "You have
just spent 30 or 40 years accumulating money. You feel
wealthy. Then, there is this all-or-nothing decision: Would
you like to annuitize today?" People want to talk to an
advisor, he says: "They are not prepared to make a single,
large-dollar decision without that kind of counsel."
MassMutual plans to introduce a new offering in April
aimed at addressing both of those issues. For participants,
it "essentially mimics that pension-making ability,"
Williams says. They can get a single account that includes
both an investment component with a series of model
portfolios as well as an income component with a flexible
immediate annuity, which can be bought in small batches
over time. The separate elements of the program already
exist, he says, but the new part is "putting it all on one
platform."
"The flexibility is huge," Williams says. "Laddering
annuity purchases can deliver 30% to 40% more income to
[participants] on a relatively safe basis than if they do
systematic withdrawals from their 401(k) plan."
The offering also includes access to an advisor who will
do an initial personal assessment and then an annual review
with the client. The client will also have "unlimited
access" to follow-ups with the advisor, Williams says.
The future may see another insurer introduce a product
based on the GRInS (Genuine Retirement Income Security)
future-income annuity concept developed by Retirement
Engineering, Inc. The current setup for offering annuities
has two basic problems, says Francois Gadenne, president
and CEO of the Boston-based company. "One is the crashing
wave of [Baby Boomer retiree] money that may exceed the
capacity of the industry. The second thing is, we know that
annuities do not sell. The problem with annuities is that
they take control away from you."
The trademarked GRInS concept aims to allow participants
to accumulate an income floor under their retirement
income. "What we have created is a family of product
concepts with a daily price for a unit of income," Gadenne
says. "I see the price for a dollar of monthly income
20 years from now is $67. I say, 'I will buy $10,000, or
10,000 units worth of it.' The idea is, 'Let's create a
product that allows you to build pension-like income as you
accumulate.'"
The company has yet to see its idea picked up by an
insurer and introduced to the market. Gadenne declines to
offer specifics beyond saying, "We are in discussion with
various companies."
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