Annuities Aren’t the Only Option for Generating Retirement Income

Annuity adoption lags, but there are other ways to help retirement plan participants prepare for income in retirement.

When the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, many in the industry celebrated it as the first step toward widespread annuity adoption. Yet a little more than a year later, only a small fraction of plan sponsors have embraced the option, according to experts.

Eric Levy, executive vice president of AIG Retirement Services, points to the COVID-19 crisis as a reason why adoption has stalled. As vaccination rates increase and workforces open up, he expects a gradual implementation of the options. “We’ve all been dealing with [the pandemic] for the past 12 months, so I think what you’ll see is a slow rise in conversation and a learning curve, and ultimately, longer-term levels of adoption.”

Until then, plan sponsors can offer a variety of services and tools for participants to gauge their future retirement income. For employers that are not ready to adopt a specific solution, Jennifer DeLong, senior vice president, managing director and head of defined contribution (DC) for the Americas at AllianceBernstein, encourages them to rethink retirement planning communication materials. “Reframe this to not just talk about the savings phase, but also about how the plan can be used to create that retirement income stream,” she says.

Employers can provide pieces of educational content and retirement income calculators—both of which are often available through recordkeeper platforms and participant websites, DeLong says. For example, resources on Social Security and when to tap into those funds help participants understand its role in their retirement income.

Levy notes that participants face a series of decisions when withdrawing income from their accounts. Offering educational resources and guides can mitigate some of that complexity. “There are a lot of complicated decisions to make, and these tools help [participants] organize these decisions and start to understand the various what-if scenarios,” he says.

The effects of the pandemic have underlined a need for holistic financial wellness programs, another benefit DeLong recommends plan sponsors implement if they haven’t already done so.  Plan sponsors might also provide different types of advisory services throughout the working life of the participant and in the retirement phase.

“All of that feeds into helping participants with how to create a basic budget, how to create emergency funds, how to save for college for your child,” DeLong says. “All of those basics in getting your financial life into better shape can free up additional discretionary dollars that can be saved for retirement.”

Providing financial advice allows participants to build a plan for generating retirement income while organizing their assets. Participants who set up a one-on-one meeting with a financial adviser can set specific goals and objectives for their retirement years, while learning about multiple retirement income options, such as guaranteed minimum withdrawal benefits (GMWBs). A GMWB promises returns on a policyholder’s retirement income throughout all types of market activity.

As employers encourage participants to stay in the company-sponsored plan throughout retirement, more are questioning what investment options are sustainable for retirees. “With that philosophy, that can lead to the question of whether they have the right investment options for retirees if they do stay in the plan,” DeLong adds.

Levy adds a similar note, saying more recordkeepers are implementing interactive tools that allow participants to understand the impacts of their financial decisions. As longevity rates have increased, the need for overall financial planning—especially in retirement—has surged. Urge participants to think about how they want to accumulate wealth for retirement and offer them resources to come up with a plan, Levy says.

“The question that every individual needs to ask is, ‘How do I take these assets that I’ve accumulated over the lifetime of my career and turn this into my paycheck? How do I take those assets and turn them into income?’” he says.