PLANSPONSOR Roadmap: Incorporating Annuities in DC Plans 

In the retirement sector, annuities are a popular topic—often easy to discuss yet challenging to implement.  

During the latest edition in PLANSPONSOR’s Roadmap Livestream Series: Retirement Income, “Incorporating Annuities in DC Plans,” speakers explored practical strategies for integrating annuities into defined contribution plans. They highlighted fiduciary duties, design considerations and communication strategies, sharing insights from plan sponsors and providers who have successfully introduced lifetime income features. 

Fiduciary Standards and Insurer Selection 

Bruce Lanser, a senior retirement plan consultant with TruSource Advisors at UBS in Brookfield, Wisconsin, said plan sponsors considering income solutions must first evaluate whether the plan participants are a good fit for the offerings. 

“Is it something that the demographics suggest participants would take advantage of? And is there an interest in offering such a program?” he asked. Lanser added that sponsors should review product structure, investment merits and costs. 

Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group, also emphasized insurer selection as a fiduciary responsibility. “You want [to] make sure that you’re taking account of the health of the insurer, the viability of the solution,” he said. “You need to probably also think about other things like portability.” 

Brian Coleman, global vice president of total rewards at Dawn Foods, echoed that point from an employer’s view. 

“That is one of those top-of-the-mind things for a plan sponsor—the viability of that insurer, making sure that that insurer is going to be around for a very long time,” he said. “We’re a 105-year-old company. We want to make sure that our plan participants have confidence now and confidence later.” 

Mechanics of Incorporating Annuities 

Matt Gray, who leads Allianz Life’s defined contribution business, described how in-plan and out-of-plan annuities work.  

The key difference between in-plan and out-of-plan annuities is their structure and distribution, Gray said. In-plan annuities, part of employer-sponsored retirement plans like 401(k)s, are purchased from an insurer chosen by the plan sponsor while the participant is accumulating assets towards retirement. Conversely, out-of-plan annuities are purchased through insurance companies that may be chosen by the participant or an adviser. 

According to Gray, the out-of-plan annuity puts most of the onus on the participant, although it offers them a wider selection of providers. He cited survey results showing that 56% of participants said they would choose a lump sum distribution at retirement, rather than an annuity, “despite the potential tax consequences, just to avoid having to make that decision and that complexity.”  

By contrast, options within the plan offer several advantages, including compounding benefits and a more straightforward method for providing the annuity. 

Lasner added that in-plan annuities also “avoid the sequence-of-returns risk,” protecting participants from market declines shortly before retirement. He noted that participants do not worry as much about what is happening to their nest egg with in-plan annuities “because they know their income is secure.” 

Recordkeeping and Target-Date-Fund Challenges 

Reddy addressed the technical complexity of embedding annuities in target-date funds.  

“There is not one established standard,” he said. “Every manufacturer has a slightly different nuanced variation of how they want to embed their feature.” 

Beyond investment logistics, he warned of data and education challenges. Reddy offered the analogy of a plan sponsor with 10 investments in a DC plan. In such a case, Reddy said there is a high likelihood that a participant is investing 10% of their assets in each investment option, minimizing the efficacy of the product. 

“Lifetime income solutions don’t work really well if you have small dollars in them,” Reddy said, noting that recordkeepers need to get in front of participants and help them understand what they are signing up for.  

Case Study: Dawn Foods’ Journey 

Coleman explained that Dawn Foods began offering guaranteed income options in 2014, well ahead of the trend.  

Initially, the Jackson, Michigan-based company provided a guaranteed minimum withdrawal benefit, which was utilized by approximately 85% of employees for their financial protection. Over time, the company transitioned to integrating an annuity within a target-date fund, while still retaining the original option. 

Coleman highlighted that Dawn’s workforce is diverse, including everyone from truck drivers to production line workers handling ingredients, as well as sales and salaried staff. To effectively communicate with this varied group, Dawn Foods utilizes monthly newsletters, electronic message boards, podcasts and a dedicated YouTube channel featuring about 450 videos. 

Communication Tips for Small Teams 

For sponsors managing benefits alone, Coleman advised leveraging advisers and customizing materials. “You’re going to have to really adjust that material to the way your organization speaks, understands and presents,” he said.  

Reddy and Gray both encouraged communicators to use illustrations, calculators and comparisons to make abstract benefits concepts concrete.  

“Most people don’t understand the amount of money that they have is not as meaningful as they think,” Reddy said. “It’s more of an engaging tone as opposed to a crisis doomsday tone.”