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.He points out that the Department of Labor has not recommended the long-term use of fixed annuities as a default investment, and suggest sponsors consider switching a fixed annuity default investment option to a product that offers age-based asset allocation.