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only about 10% of company-sponsored plans offer annuities.
Boan, Pfau and Tamiko Toland, head of lifetime income
strategy and market intelligence at TIAA in Ithaca, New York,
all say this is changing, though, and retirement income's
moment may have finally arrived. Slowly but surely, more
income options by more providers are being offered inside
company plans. This represents an evolution in the industry
and, as some have pointed out, a transformation of 401(k)s
from savings vehicles into retirement income plans.
According to Pfau, the passing of the Setting Every
Community Up for Retirement Enhancement Act of 2019 was
a turning point for retirement income.
" With the SECURE Act, we see more options developed
that are focused on retirement income and not just the accumulation
phase, " Pfau says.
The law provides safe harbor protections for companies
that offer annuities inside retirement plans. In February,
the Lifetime Income for Employees, or LIFE, Act was reintroduced
in the House of Representatives. That legislation would
enable more employers to benefit from the safe harbor. It
would also allow annuities to be a default investment, with
the stated goal of supporting workers as they seek to build a
steady, guaranteed income stream for their retirement.
" Before, an employer plan was taking on a lot of risk if
it offered an annuity, " Pfau says. " It's good that employers
may now provide retirement income options without taking
on a whole new level of responsibility, " he says. " Effectively,
plans can offer approaches more aligned with defined benefit
pensions once again, instead of defined contribution. "
There is no one best approach, he notes, having focused
recent research on four retirement income styles:
* A total-return style. Many registered investment
advisers use this style, where, in the decumulation phase, the
focus is on taking distributions and generating income from
diversified investments.
* A time-segmentation approach. Here, retirees use
investments for retirement. They cover short-term expenses
with bonds and leave stocks for long-term expenses.
* An income-protection style. This method provides a
base of income, such as through an annuity, with additional
funds invested.
* A risk-wrap approach. Investors have a protected
income floor, for instance, through a variable annuity, but
can still invest for upside gains and maintain some liquidity.
Pfau's research shows that only one-third of the population
has a retirement income style that resonates with the
total-return approach, though that is the most popular with
advisers. " If that's the only option a 401(k) plan offers, it's one
that only appeals to about a third of the population, " he says.
Out-of-Plan Annuity Compensation Models
Individual adviser commission structures have played a role
in putting more of an emphasis on participant accumulation
vs. decumulation. Fee structures based on assets under
management incentivize investment managers to keep as
much as possible in the portfolio. If advisers sell an annuity
to generate retirement income, that potentially damages the
practice by lowering assets under management, Pfau notes.
Now, however, annuity providers are offering fee-based
annuities that allow investment managers to earn compensation
on assets held within an annuity.
" If I'm managing $1 million for a client, and I charge a 1%
fee on that, I can now also charge that 1% fee on the value of
the annuity, " Pfau explains.
A New Focus on Retirement Income
Other initiatives show what Pfau describes as a " slow evolution "
of the market to meet unaddressed needs regarding
advice, education and structures that support decumulation
and retirement income. They include new industry associations
such as the Retirement Income Consortium, with AllianceBernstein,
Allianz, BlackRock, Income America, Nationwide,
Principal Financial Group, Prudential Financial and
TIAA-Nuveen as members, among others.
A research initiative by the Organization for Economic
Cooperation and Development has focused on how to
improve the certainty of retirement income. The OECD has
also issued a formal recommendation for DC plans to include
lifetime income by default, by pooling longevity risk among
participants.
TIAA is educating advisers and plan participants about
to secure guaranteed lifetime income. A
their options
provider of in-plan annuities, TIAA, in June, published " Separating
Facts From Perception: The valuable role that in-plan
annuities can play in retirement SECURE-ity. "
Toland says the approach to income should be fundamentally
different than the way the industry has traditionally
viewed accumulation.
" People need an income strategy, " Toland says. " We want
people to stop thinking that if they have a certain amount
in the bank, they'll be OK. With the swings of the market, a
systematic-withdrawal strategy isn't safe. We're in the middle
of a major evolution of the 401(k). It was never designed to
replace a pension. We are seeing a technical and philosophical
retooling of the 401(k) to meet that purpose. "
Interest in embedding annuity solutions into plans has
also taken the form of new, financially engineered products.
In 2018, TIAA launched RetirePlus, a way for plan sponsors
and consultants to create models that include guaranteed
income investments within a target-date-like structure.
This year, RetirePlus surpassed $10 billion in assets, TIAA
says. Now it is offering guaranteed lifetime income solutions
to the corporate 401(k) retirement market.
Annexus, has created a product that works the way a
traditional target-date fund works, combined with a group
fixed annuity. Annexus' Boan notes that, instead of owning
equities and fixed income in a TDF, participants own equities,
fixed income and shares of a group fixed annuity.
" How to move from non-income-generating solutions to
income-generating solutions should be a core talking point
for every plan and all advisers in the market, " Pfau says. " It
was a turning point when TDFs became the default option.
When income solutions become the default option, that's
when we'll really see the industry take off. " -Rhea Wessel
planadviser.com July-August 2022 | 37
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PLANADVISER - July/August 2022

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