White Paper Tackles Annuity Purchase Confusion

Annuities can help manage defined benefit (DB) plan risks, but retirement plan sponsors should contemplate a few common misperceptions, The Principal Financial says. 

Pension risk management is an ongoing process, and in an ever-changing environment, it can be a challenge for plan sponsors to manage the risks of their DB plans. The Principal Financial Group aims to clear up some of the confusion around annuity purchases and help plan sponsors make informed decisions through discussion of common scenarios, case studies, modeling and examples in a new paper, “What Can We Learn from Six Common Annuity Purchase Misconceptions?”

The paper takes plan sponsors through different scenarios while illustrating the potential impacts on a DB plan. Using a “solution-neutral approach,” it provides a thorough look at each scenario and includes information to help analyze various risk management options for each unique situation.

“Like any risk-management strategy, an annuity purchase requires careful consideration to determine if it will meet long-term objectives,” said Mike Dulaney, senior consulting actuary at The Principal. “It’s critical for plan sponsors to understand the impact of the annuity purchase on future plan finances, plan risks and also what other risk-management strategies might be needed to meet objectives. By better understanding the true impacts on their defined benefit plans, plan sponsors can more effectively weigh their risk-management options and implement strategies that help meet their goals.”

The paper shines a light on these misperceptions:

  • Funded ratios aren’t impacted by annuity purchase for “fully funded” plans;
  • Annuity purchases always reduce PBGC premiums;
  • Ongoing DB plan accounting expense is always lower after an annuity purchase;
  • Purchasing annuities now for a frozen plan is likely to reduce the overall termination cost;
  • Purchasing annuities is likely to reduce funded status volatility; and
  • If I purchase an annuity, there is no need to do anything else to manage pension risk.

“What Can We Learn from Six Common Annuity Purchase Misconceptions?” can be downloaded here.