Popular options, she said, include the single premium immediate annuity (SPIA), which is purchased with a lump sum distribution out of the 401(k) plan. It’s irrevocable, but can include inflation protection. And the fixed indexed annuity (FIA), which is often used when someone is saving for retirement, as opposed to the SPIA, which is more for people about to need the income right away.
When a fiduciary advisor is helping a plan sponsor with annuity-provider options, the vetting process is the same as it is with any other vendor, Campion said.
“So now we have another vendor in the mix and that’s the insurance agent or insurance expert, and we much thoughtfully select and monitor that new vendor,” she said. “It’s no different from hiring a mutual fund manager, even though we’re hiring an agent that’s offering a contract and not an investment.”
And in order for plan sponsors to have safe-harbor protection should they make the decision to add an annuity option to their 401(k), they have to follow some specific requirements, including evaluating the issuing strength and financial stability of the insurance company, confirming state licenses and assessing fees and expenses. For example, Campion said that in terms of issuing strength, an insurance company might have to be in the top 50th percentile relative to peers in that state. Or to show acceptable stability, that company has to have 10 years of financial audits.
“Whether you’re a discretionary or non-discretionary advisor, if you maintain a fiduciary relationship with your client, you’ll be expected to follow and document a selection process to understand and benchmark the underlying costs and performance of the annuity product,” she said.
The downside for advisors to retirees is that participants may not want to roll their money out of the plans when retirement arrives.
“They’re getting everything they need in the plan, albeit at some cost,” Campion said. “But they’re getting their lifetime income satisfied while keeping their money in the plan.”
And that, she continued, is what will make these in-plan annuity options so desirable. The financial industry has done a good job helping people save enough to live to 90, but not so much for after that, she said.
However, financial advisors can step up to help their clients in a way that could make an in-plan annuity moot, she said.
Strategies in 401(k) plans for participants nearing retirement typically tamp down on equity risk with a glide path mechanism to a model portfolio strategy. “But we haven’t solved the longevity risk problem—the risk that we might outlive our assets because we live too long in retirement—using traditional glide path solutions,” Campion said.
One solution, which would be out-of-plan, is to offer the newly retired participant a deferred indexed annuity. The person who has saved enough to get to 90 only has to insure to 105 or 110.
“These instruments are relatively inexpensive and are the exact offering one would need to solve for longevity risk, without impeding the growth or changing the growth trajectory of the traditional strategy,” she said.