In-Plan Annuity Market Slowly Takes Shape

Retirement plan providers are striving to implement new ideas and capabilities made possible by the SECURE Act even as they grapple with the challenges of a pandemic.

Nate Miles took on the role of head of the defined contribution (DC) business at Wells Fargo Asset Management (WFAM) about three years ago.

As he tells PLANSPONSOR, it has been an exciting and dynamic time to work in the retirement plan services industry.

“Time flies when you’re having fun, and also when things get challenging, as they have recently,” Miles says.

Naturally, responding to the coronavirus pandemic has become a key part of Miles’ job these days, but he points out that firms such as Wells Fargo Asset Management and its competitors are also still striving to achieve their longer-term strategic visions. For WFAM, this means continuing to refine and expand its product set designed for DC plan investors, especially with the launch of new collective investment trust (CITs) and a new in-plan lifetime income product.

“Our CIT focus remains strong because we believe this remains a long-term structural trend,” Miles explains. “When we started this journey at Wells some years ago, we knew that three things really tend to drive change in the DC plan space—legislation, regulation and litigation. This remains as true as ever with the rollout of the Setting Every Community Up for Retirement Enhancement [SECURE] Act helping to define our ongoing efforts.”

Miles says the SECURE Act’s in-plan annuity selection safe harbor has inspired the firm’s new lifetime income solution, which he says is distinguished by, among other aspects, the provision of “3(38) fiduciary level support from WFAM.” In basic terms, the product will involve purchasing a qualified longevity annuity contract (QLAC) which kicks in at age 85 with 15% of an investors’ DC plan assets. The solution also will help investors effectively spend down the remaining 85% of their assets in a way that is smartly coordinated with Social Security and other income sources.

“With our in-plan solution, Wells Fargo Capital Management will actually be making the 3(38) fiduciary investment selection decisions around which insurance carrier to utilize within the product,” he explains. “We will be providing an objective and thorough search to identify appropriate insurance carriers based on their solvency and financial strength—and we will carefully consider the cost relative to benefit.”

Looking ahead, Miles expects that the adoption of in-plan annuities will be a process that closely involves all stakeholders in the retirement plan industry, from the recordkeepers and asset managers to the plan sponsors, participants and advisers.

“Any successful product in this space is going to need to be easy for recordkeepers to work with,” Miles emphasizes. “Delivering these capabilities is a tough lift for recordkeepers, so we need to be cognizant of their abilities. Income has to be built with an understanding of each platform’s capabilities. This is really important for the portability.”

Miles speculates that it could take three or four years for a mature in-plan retirement income landscape to truly emerge. He expects the major recordkeepers will use that time to build out their preferred approaches and to offer “some level of choice to clients, perhaps two or three options per platform.”

Rob Reiskytl, leader of Aon’s national retirement strategy and design team, agrees with Miles’ broad characterization of the retirement plan industry’s path toward providing high-quality, affordable and portable in-plan annuities.

“The portability question is particularly interesting and is more important than perhaps some people have suggested, particularly from the employer perspective,” he explains. “Consider the case in which an employer has selected an annuity provider and keeps that insurance firm’s product on their DC plan menu for some time, say five years. What happens when, down the line, the relationship with that insurer ends? What happens to the participants’ assets? What will be the roles and responsibilities of employers in rolling over those assets to another product?”

Echoing Miles, Reiskytl says he is optimistic that the retirement plan provider ecosystem will find a way—and in fact multiple ways—to rise to this occasion and find solutions that are attractive to the employer and to the employee.

“It is also important to acknowledge that, like with any emerging product class, there will be successes and failures,” he muses. “Some providers may change or drop out or consolidate. It’s going to be very dynamic, with a fair amount of innovation.”

Moving forward, Reiskytl concludes, it will be important for those in the industry to be precise in their discussions of annuities and lifetime income. Strictly speaking, the term “annuitize” implies the use of an insured lifetime income solution—meaning it has a guarantee purchased in exchange for money.

“Some of the solutions we see come into the market might not actually involve annuitization as such in order to be a part of the ‘lifetime income’ discussion,” he explains.

Other points that should be clarified for clients are the differences between annuity types—particularly between immediate and deferred annuities, and between single life annuities and joint/survivor products.