Like many employers, Fisher, the corporate benefits manager for Smithfield Foods, cringed when she heard the terms "variable annuity" and "401(k) plan" in the same sentence. Variable annuities often have high fees and lock-in periods. Also, despite some brokers’ efforts to sell these products to 401(k) plan sponsors, they often don’t make sense in a retirement savings vehicle because their main selling point is that they are tax-deferred. Of course, 401(k) plan assets are already tax-deferred.
But upon digging deeper, Fisher and her team learned that Genworth Financial’s ClearCourse offering wasn’t a standard variable annuity product. The offering is specifically designed to act as an investment option within a 401(k) plan, and thus has no lock-in period. Investors are guaranteed to get back what they contribute, and in many states are given the option to step up their guaranteed income amount each year.
"It has the flexibility of a mutual fund account, but you get that guarantee," Fisher says. The cost of the guarantee is 85 basis points, which on top of the costs of the underlying investment options ranges from 99 to 217 basis points—less than half of what standard annuity products can cost.
In the past several months, Genworth, Metropolitan Life Insurance and Hartford Life Insurance have come out with annuity options for 401(k) plans that guarantee income for participants after they retire.
Officials at these companies believe that as the baby boomers begin to retire, having enough income post-retirement will become a greater concern for all employees.
Also, these vehicles can be particularly attractive to employers that are switching from defined-benefit to 401(k) plans, officials say. "We have talked to a lot of plan sponsors that are terminating or are freezing their defined-benefit plans," says Tom Applegate, director in the retirement group of Merrill Lynch, which has teamed up with MetLife to sell its Personal Pension Builder product.
"Ninety percent of our population
are production-type employees, and they aren't making huge dollars.
They don't want to lose their savings
to the stock market."
-- Mary Fisher, Smithfield Foods
The Personal Pension Builder as well as Hartford’s Lifetime Income Program are deferred-income annuity products that act as an investment option within the 401(k) plans. One of the issues with buying an annuity at retirement is that employees can’t predict what the interest rate will be at that time, and thus may not get the returns they want, Applegate says.
But with Personal Pension Builder as well as Hartford’s product, employees can buy the product at a time when they believe that interest rates are at a peak and set that rate for the term of the contract.
These offerings can be particularly attractive for employers that want to retain and attract older workers, a more common trend as many anticipate a talent shortage, says Stephen Shepherd, director of product development at Hartford Life.
"It’s a great complement to a stable-value fund," he says.
Experts agree that the concern around having enough for retirement will grow in coming years, but many are skeptical about whether younger employees will demand these products anytime soon.
"I just don’t know that 35-year-olds are interested in these offerings, whether they are great products or not," says Ted Benna, COO of Malvern Benefit, who is also known as the architect of the first 401(k) plan.
But Fisher says that since making Genworth’s offering available to its 40,000 employees on June 1, there has been a lot of interest. Even though the average age of Smithfield’s employees is around 40, they are concerned about having enough income after they retire, Fisher says.
"Ninety percent of our population are production-type employees, and they aren’t making huge dollars," she says. "They don’t want to lose their savings to the stock market."
Workforce Management, August 28, 2006, p. 30 -- Subscribe Now!
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