PSNC 2021: In-Plan Guaranteed Income: Will the SECURE Act spark a transformation of the 401(k) industry?

A PSNC session explored participant demand for retirement income, the types of guaranteed solutions available and a process for evaluation and implementation. 

During day three of the 2021 virtual PLANSPONSOR National Conference (PSNC) a panel of speakers debated whether in-plan guaranteed income provisions in the Setting Up Every Community for Retirement Enhancement (SECURE) Act could alter the retirement industry’s long-held stigma toward annuities.

Matthew Wolniewicz, president at Income America, began the discussion by underscoring the investment risks plan participants assume themselves, especially during times of market volatility. These periods—the most recent being the market instability as the coronavirus pandemic hit the U.S. in March 2020—can cause investors to make impulsive and damaging decisions that affect their portfolio’s longevity, Wolniewicz said. “We all know that investors do wrong things at the wrong time, and especially during periods of market volatility,” he noted.

This is even more true for retirees or employees who are heading into their retirement years, many of whom are anxious not just about the market’s volatility, but how their longevity will play out in the next 20 to 30 years.

“People are faced with uncertainty not only in how the markets will perform, but in how long they will live,” Wolniewicz said. As they age, many people fear any financial decision could upturn their investment options, such as pulling their money out during a period of market instability or keeping their money in.

These participants say having a guarantee of income throughout retirement would put them at ease and would make them more likely to avoid taking out their 401(k) funds during volatility, Wolniewicz said. “Eighty percent of participants said they would leave their money in the plan if they knew they would get some help during retirement,” he noted, citing a 2019 Willis Towers Watson study.

As more participants show an interest in guaranteed income, plan sponsors are taking notice. A BlackRock survey cited during the panel recently found that 96% of plan sponsors feel a newfound sense of responsibility in offering annuity products, with 82% saying they are likely to add an annuity solution in the next 12 months. As sponsors realize the impact their plans have on a participant’s retirement, more are implementing features that supplement income, the panelists noted.

“Sponsors today are concerned about doing the right thing for their end-employees,” Wolniewicz said. “The two ways that any participant will have retirement income will be through Social Security and plan savings, so sponsors are looking for solutions that will provide income.”

Yet, as much as there is interest in annuity features, there is confusion about the solutions as well. Employers that were concerned about annuity products said the features were too administratively complex (75%), had high fees (61%), were too complex or unproven (60%) or they were worried that participants may face portability restrictions (58%).

“The pain points are longevity risk and sequence of return risk in retirement,” added Brian Seelinger, a senior portfolio manager with Northwest Bank. “People don’t know these phrases in retirement, but they know the inherent risk and fear.

“The primary barrier to implementing some type of income has been the complexity and the fees, but also the potential risk that a poor selection would expose the sponsor to liability,” he continued.

Seelinger explained that a large reason plan sponsors are often uncertain about annuities is the fees. Insurance, separate accounts and riders are included in the overall fee costs, which can be difficult to calculate or track.

While the SECURE Act has eliminated a major hurdle for plan sponsors, employers are also still puzzled about where they can begin researching their options, Seelinger said. “It’s so complex with so many moving parts, that it really is something that requires special knowledge,” he said.

Vidya Rajappa, vice president, portfolio manager and head of portfolio management multi asset strategies at American Century Investments, explained optional annuity riders to plan sponsors during the panel, including a guaranteed minimum withdrawal benefit (GMWB). Adding a GMWB guarantees a steady stream of retirement income by allowing participants to withdraw a percentage of funds each year, regardless of market conditions, Rajappa said.

Aside from access to account assets, a GWMB can capture market upsides while avoiding any impact from down markets. Additionally, any assets remaining upon death are transferred to beneficiaries, income is paid from assets until they are depleted and income will continue even after assets are depleted, Rajappa said.

The panel also suggested soluble steps for employers wanting to implement annuity products. First, define plan goals and vote to add an in-plan guarantee product to the plan. Second, update any documents, including adding an in-plan guarantee option to the plan’s investment policy statement (IPS). Third, research options and compare them to determine what would be a good fit with participant preferences. From there, plan sponsors can make their decision and proceed with the implementation process.

The panelists emphasized that plan sponsors should provide consistent documentation and communication to participants throughout the process, and especially once a decision is made.

Seelinger said he expects more plan sponsors to partner with financial advisers in the future, as more employers look to add annuity features. As a result, more advisers will expand their expertise, he noted.

“We think there’s going to be a flight to more educated advisers who may not just have a Chartered Financial Analyst [CFA] designation, but are also able to break down risk parameters,” he said. “It’s going to be a situation where someone who goes through these steps will really have to rely on independent third-party experts.”