403(b) Webcast: The Role of Guaranteed Fixed Annuities in 403(b) Plans

Scott Senseney, VP Client Consulting, Tax Exempt Retirement Services, Fidelity Investments, explained that with “conventional” fixed annuities there are greater liquidity restrictions.  

Specifically these contracts may provide for: 

• Limited capability for immediate exchange for portfolio re-balancing; 
• Phased withdrawals over as many as 10 years; 
• Limited capability for consolidating prior employer contracts from multiple vendors into new employer contract; 
• Limited ability for retirement lump sum withdrawal; for example, lump sum withdrawal allowed only within a 120 day window of retirement date; and 
• A surrender charge that can vary between 2.5% and 7% of account balance. 

However, Senseney said, with “newer” fixed annuities there are fewer liquidity restrictions.  

Features of “newer” products include: 

• Few in-plan transfer restrictions; 
• Enables re-balancing and diversification of participant’s portfolio based on age and risk profile; 
• No new retirement plan transfer restrictions; 
• Ability to consolidate and manage fixed annuity assets from different vendors and different employers; 
• No lump-sum withdrawal restrictions at retirement; 
• Enables participants to build a market-competitive personalized retirement income portfolio from in-plan and out-of-plan vendors; and 
• No surrender charge. 

For plan sponsors who wish to switch from conventional to newer fixed annuities, Fidelity says: 

• Seek fixed annuity fee transparency and clarity of crediting rate setting process; 
• Choose a fixed annuity that does not impose significant liquidity and transfer restrictions or surrender charges on participants, especially at retirement; 
• Choose a fixed annuity that allows participants flexibility to change investment strategies within the plan; 
• Choose a fixed annuity that does not lock participants in to proprietary-only immediate annuities at retirement; 
• Consider a retirement income platform that has multiple providers, allowing the pre-purchase comparison of multiple market-competitive product offers; and 
• Get a lifetime income quote from your current annuity provider and compare against current market quotes.  

Senseney says as a default plan investment, fixed annuities are not a good choice, especially because younger participants will be too heavily invested in fixed income investments. Participants defaulted into fixed annuities or stable value investments are under-exposed to equities compared to those invested in an age-based allocation, and younger participants are three times more likely to be under-exposed when defaulted into fixed annuities, according to Senseney.