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Organization Looks to Make Annuities an Option for Plan Sponsors

April 28, 2011

Dallas Salisbury’s parents lived long lives.

When they prepared for retirement, they believed they would live into their 80s and planned to use different retirement savings vehicles to pay for expenses. One of those methods was a small annuity they received through a pension plan.

Salisbury, now the president and CEO of the Washington-based Employee Benefit Research Institute, says his parents lived well into their 90s—much longer than they expected.

“They basically lived longer than 96 percent of the people they were born with,” Salisbury says. “It was this annuity that allowed them to have income until their death.”

An annuity isn’t a popular retirement income stream for employers with defined contribution plans to offer and for participants to take. Yet the Profit Sharing/401k Council of America is trying to make an annuity—a regular, periodic payment made by an insurance company to a policyholder for a specified period of time—more mainstream by giving members’ retirement plan participants an Orbitz-like experience to compare, research and choose annuity providers at institutional-level pricing.

Since April, Profit Sharing council members have been able to link into the Hueler Income Solutions platform, an annuity marketplace where participants can research options, receive specific quotes and purchase products from nine participating insurance providers.

“People need retirement options. There is no single, right answer,” says David Wray, president of the Chicago-based Profit Sharing council. “Small and medium-sized companies don’t have the resources to have an in-house program of support like this.”

This is the latest service the retirement security advocacy group is offering to help build its membership. In January, the Profit Sharing council launched its fiduciary training program designed to help employees understand fiduciary responsibilities when working with retirement plans covered by the 1974 Employee Retirement Income Security Act.

“We are trying to come up with ways to help the plan sponsor community but also build membership,” Wray says. “These [programs] enhance our menu of attractiveness.”

There are 1,200 active members in the Profit Sharing council with 6 million participants, ranging in size from Fortune 100 companies to small businesses. One company is currently interested in accessing Income Solutions, Wray says, and he hopes more will follow during the next six months.

Income Solutions is an online annuity marketplace offered by Minneapolis-based Hueler Investment Services Inc. Employees with access to Income Solutions can determine if buying a fixed annuity with some or all of their retirement assets makes sense for their financial situation.

An online calculator provides an estimate of monthly income streams by entering variables including age, gender, survivor benefit percentage and dollar amounts. Participants can receive specific annuity quotes from up to nine major insurance companies.

Income Solutions’ fee for Profit Sharing council member participants is 1 percent. Typically, the cost of a comparable annuity in the retail market is about 5 percent of the amount annuitized, Wray says, adding that his group is not charging a fee for the service.

“Plan sponsors spend a lot of time and money helping participants on the accumulation side,” he says. “I think we will be serving a real need here in providing competitive pricing.”

To be part of the platform, insurance companies must agree to transparency, offer institutional rates on annuities and show fees for services. Companies on the platform stay competitive with blind monthly updates on competitors’ rates.

Income Solutions is used by about 1,000 large plans but is also offered through plan administrators including Aon Hewitt and Vanguard Group Inc. The National Association of Personal Financial Advisors is the only other association offering the platform to members.

“This is the first opportunity we’ve had to create a means to help mid- and small- businesses gain access,” says Kelli Hueler, CEO of the Hueler Cos.

For defined contribution plan participants, annuities have never been a popular option. According to the 2010 Profit Sharing council’s 53rd annual survey of profit sharing and 401(k) plans, 99.4 percent of plan sponsors offered lump sum retirement distributions, while only 18.9 percent offered annuities.

Aon Hewitt’s Trends and Experience in 401(k) Plans Study showed 84 percent of retiring employees took a lump sum payment in 2009. Of the 14 percent of companies that offered an annuity option to participants, just 1 percent took it.

Meanwhile, 60 percent of Aon Hewitt’s 105 large clients offer Income Solutions to participants, yet less than 1 percent of them use it, says Alison Borland, retirement strategy leader for Aon Hewitt in Nashville.

“Annuities have a connotation that is often negative, mostly because of cost,” Borland says. “We continue to believe annuities can be an important part of a retirement portfolio.”

Salisbury says the importance of considering annuities in lifetime income strategies will grow as more baby boomers reach retirement.

“If employers don’t offer it, then individuals will be even less likely to do it,” he says.

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