Are Deferred and Income Annuities the answer for your 401k Plan?
Given the stock market’s volatility, a number of 401k plan sponsors are seriously discussing adding an annuity option to their 401k plans. With most employees’ 401k accounts decimated, the idea of providing guaranteed post-retirement income seems attractive, experts say.But while many companies are talking about annuities, very few employers are actually adding them to their 401k plans.
Only 8 percent of 401k plans allow participants to roll over their account balances to an annuity upon retirement, according to Hewitt Associates’ "2009 Hot Topics in Retirement." Twenty-two percent expect to add this option to their plans in 2009.
Annuities have Employers Wary
There are a number of reasons—ranging from fees to fiduciary concerns—why employers are wary of adding annuities to their plans, experts say. The swings in the stock market and the ongoing economic downturn also have many companies paralyzed. Given the current environment, many plan sponsors are going slowly as far as making any changes.But despite the current doubts, many consultants believe that annuities are going to become a more accepted part of 401k plans.
Annuity options | Income or Immediate Annuities
Plan sponsors basically have two options with regard to adding annuities to their 401k plans. The first option is to allow employees at retirement to roll their 401k accounts into an income or immediate annuity, which provides them with a guaranteed stream of income. For plan sponsors, the main advantage of offering income annuities outside of the plans is that they don’t have fiduciary responsibilities over these products and the record-keeping is relatively simple.The other option for employers that want to provide guaranteed income to employees is adding deferred-income annuities within their 401k plans. Over the past few years, a number of providers, including Prudential Financial, have introduced such products.
The details of how income or immediate annuities work depend on the offering. Prudential’s IncomeFlex product offers a guaranteed-withdrawal benefit with a target-date fund or a balanced fund within the employer’s 401k plan.
The plan participant doesn’t start paying for the guaranteed income from the annuity until age 50. At that point, through retirement participants are guaranteed their income base will grow at an annual minimum of 5 percent, says Mark Foley, vice president, innovative simplicity-retirement income at Prudential Retirement. The guarantee costs 100 basis points. Prudential has signed up more than 100 plan sponsors for the product.
Addressing concerns about Income and Deferred Annuities
The biggest worry for consultants and employers is the fiduciary responsibility for annuities. Given the complexities of these products and the bad news swirling around the insurance industry, consultants warn employers to really do their due diligence on annuities.Record-keeping can also be difficult, and employers are concerned about the educational challenges of offering annuities, which are traditionally viewed as being complex.
Fees are another concern for many employers. It’s hard to assess how much these products cost because the price tag varies widely depending on the investment options. The range is typically between 50 and 200 basis points for the guarantee.
However, many consultants believe that as these products evolve, the record-keeping and fee issues will resolve themselves. And there are talks on Capitol Hill about ways to make annuities easier to add to 401k plans, experts say.
Despite their complexities, consultants believe that employers should think seriously about adding some kind of guaranteed-income annuity option to their 401k plans. As a result, organizations are looking at the annuity accumulation feature are doing it to make sure that their workforce planning comes to fruition.
