Because of SECURE Act 2.0, advances in technology, and innovative product design, LIMRA expects the in-plan annuity opportunity is likely to grow exponentially over the next couple of years, enabling more workers to invest in guaranteed income within their defined contribution retirement savings account.
Summary:
- LIMRA expects greater adoption of these in-plan guarantees over the next 6 to 12 months and throughout 2024.
- Educating advisors, plan sponsors, and employees on the value of in-plan annuities will affect their acceptance.
- LIMRA research shows that workers’ need and desire to create a guaranteed income within their employer-sponsored retirement savings plans is high.
LIMRA Research Head, Bryan Hodgens explains the growing market opportunity for in-plan guarantees and the role of education.
LIMRA expects greater adoption of in-plan guarantees over the next 6 to 12 months and throughout 2024. The main goal is to get large plan companies to adopt an in-plan annuity, assuming others will follow.
This starts with financial advisors and consultants.
Financial advisors set up 93% of retirement plans.
If you convince these advisors of the benefits and value of these products, their adoption will spread.
Bryan Hodgens
An in-plan annuity is a feature within a DC plan that converts plan savings into a stream of guaranteed income payments during retirement. In other words, it provides a pension-like income. Designs of in-plan guarantees include:
- Annuities that are inside of a target date fund, such as a 401(k)
- A stand-alone annuity product
- Annuity options that are outside of the plan, but are linked
Following the recent passing of SECURE Act 2.0, LIMRA expects greater adoption of in-plan guarantees in late 2023 and 2024. This will allow workers who need it to invest in a pension-like income. In this article, we will discuss the need among Americans for in-plan guarantees, and the opportunity for our industry to bring more education and awareness around these products to help with their adoption.:
LIMRA research indicates a growing need for in-plan guarantees:
Bryan Hodgens
As Hodgens suggests, increasing the adoption for in-plan annuities can help more Americans feel secure about their retirement. LIMRA data suggests four reasons why Americans have a growing need for in-plan guarantees:
Access to traditional pensions is decreasing
Only about a third of households (30 percent) have a defined benefit pension plan. For younger workers (Millennials and Gen Z), the proportion with access to a DB plan is considerably lower.
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About 35 percent of pre-retirees express “major concerns” about running out of money in retirement. Longevity risk affects women more than men (44 percent versus 29 percent).
People fear outliving their savings in retirement
Source: 2020 Consumer Survey, LIMRA
Americans aren’t saving enough
LIMRA data shows half of households have $64,000 or less in DC plans/IRAs retirement savings.
LIMRA research shows employees want
guaranteed lifetime income.
Currently, only 14 percent of DC plans offer the option for participants to annuitize their plan balances. Additionally, 70 percent of workers believe the in-plan guarantee should be an option. A recent TIAA survey showed that 85 percent of employers who are familiar with and already offer in-plan guarantee options say they are valuable for employees, and 72 percent of employers say they are highly interested in target date funds that allocate toward guaranteed income.
Source: LIMRA analysis, Bureau of Labor Statistics, National Compensation Survey: Health and Retirement Plan Provisions in Private Industry in the United States, 2019.
Bryan Hodgens
LIMRA data suggests that education will help annuities gain more acceptance in retirement plans:
In 2023, LIMRA will continue to research the growing in-plan annuity market.
Media inquiries
Catherine Theroux, (860) 285-7787, ctheroux@limra.com
Brooke Lacey, (413) 530-6184, blacey@limra.com
Bailey Reed, (770) 984-3788, breed@loma.org
Bryan Hodgens
An annuity inside of a 401(k) plan is rare. LIMRA research suggests that DC plan advisors and consultants have little knowledge about in-plan annuities. In fact, 3 in 10 advisors also believe that guaranteed income solutions need simplification for their clients to understand them and are not worth the additional cost compared to other products. They also believe the sales process takes too much of their time.
Source: Fidelity 2019 Plan Sponsor Attitudes Study
This is a key group to educate on about in-plan annuities because according to Fidelity Investments, advisors set up 93 percent of retirement plans.
Additionally, Hodgens suggests the industry can educate all parties who would be involved with in-plan guarantees:
- Advisors and consultants: Explain the opportunity (how the SECURE Act removed many barriers to entry for these products), the demand for these products, how the industry is improving the evaluation of in-plan guarantees, and explain how the products work.
- Employers (plan sponsors): Explain safe harbor and protections for performing due diligence in acting as a fiduciary. Describe the technology available for evaluating different annuity products, and explain how to manage and maintain them.
- Employees (plan participants): Provide resources on “pension replacement” and “ensuring an income.” Deliver a simple explanation of how the annuity works inside of a TDF, and how that creates a withdrawal strategy with options.
- Record keepers: Make the investments to get the proper technology in place to support these plans.
On the subject of technology, Hodgens comments on how it will facilitate the portability of in-plan annuities. Software companies have created “middleware” that enables the movement of annuities from one trustee to another.
Bryan Hodgens
The opportunity is there. If our industry can provide effective education to all parties involved, more Americans could access a pension-like income.