ver since his company closed its defined-benefit plan to new hires in 2007, Tony Cost has been looking for ways to guarantee his 401(k) plan participants some post-retirement income. But it’s just been recently that his colleagues have started to take his idea more seriously.
"This could mean a hell of a lot to a retiree," says Cost, who is vice president of HR at Silgan Containers, a Woodland Hills, California-based container manufacturer with 4,000 employees.
Given the stock market’s volatility, Silgan is one of a number of 401(k) plan sponsors seriously discussing adding an annuity option to their 401(k) plans. With most employees’ 401(k) accounts decimated, the idea of providing guaranteed post-retirement income seems attractive, experts say.
But while many companies are talking about these offerings, very few employers are actually adding them to their plans.
Only 8 percent of 401(k) 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.
Four percent of employers have an annuity or insurance product as an investment option within their plans, while 13 percent say it’s likely that they will add this option to their plans in 2009, according to the survey.
"It’s a situation where there is discussion but very little action," says Phil Suess, worldwide partner at Mercer.
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, Suess says. "Given the current environment, many plan sponsors are going slowly as far as making any changes," he says.
But despite the current doubts, many consultants believe that annuities are going to become a more accepted part of 401(k) plans.
"As more plan sponsors have gotten out of the defined-benefit plan business, defined-contribution plans have to provide this retirement income," says Martha Tejera, a Bainbridge Island, Washington-based retirement plan consultant. The challenge is getting employers to buy into the idea, she says.
"I do think there is an economic payoff in helping employees secure their retirement," Tejera says.
Annuity options
Plan sponsors basically have two options with regard to adding annuities to their 401(k) plans. The first option is to allow employees at retirement to roll their 401(k) accounts into an 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, says Pam Hess, director of retirement research at Hewitt.
Jody Strakosh, national director of strategic alliances for MetLife’s Institutional Business, says she is seeing an increase in employer interest in MetLife’s immediate-income annuity product. "We are definitely seeing an uptick due to the economy," she says. "Plan sponsors are trying to figure out how they can provide retirement income for participants."
The other option for employers that want to provide guaranteed income to employees is adding deferred-income annuities within their 401(k) plans. Over the past few years, a number of providers, including Prudential Financial, have introduced such products.
The details of how these products 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 401(k) plan.
The plan participant doesn’t start paying for the guaranteed income 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.
More recently, Barclays Global Investors launched SponsorMatch, which combines the idea of a target-date fund with a deferred annuity. With traditional target-date funds, the investor’s assets reallocate from being aggressive to more conservative as the investor gets closer to retirement age. With SponsorMatch, a portion of that investor’s assets moves into an annuity product that the investor could draw upon at retirement, says Chip Castille, managing director and head of product development for the defined-contribution business at Barclays.
Barclays is currently offering the program in conjunction with MetLife, but is talking to a number of insurers, he says. The company is in talks with a number of plan sponsors but has not yet signed up a client.
Addressing concerns
While the sales pitch for adding deferred annuities to 401(k) plans sounds good, employers have to work through a number of issues before signing up, consultants say.
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.
"What happens if you pick the wrong insurance company?" Hess says.
That is one of the issues that Silgan is currently working out with its record keeper, Mercer, as it discusses adding Prudential’s IncomeFlex product.
"There is no PBGC mechanism out there for these products," Cost says. Of particular concern for many companies is what would happen if the insurer backing up the product goes out of business, he says. "There is nothing backing up that asset."
Barclays recognizes that concern, which is why the company is offering its product through a number of insurance companies, Castille says.
Record-keeping can also be difficult, and employers are concerned about the educational challenges of offering annuities, which are traditionally viewed as being complex.
"People hear the word ‘annuity’ and turn off," Cost says. "It’s going to take some serious hand-holding and patience to make sure this is understood."
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. Tejera estimates the range is 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 401(k) plans, experts say.
"I think you will see a lot of interest in Washington in the coming months," Strakosh says.
Despite their complexities, consultants believe that employers should think seriously about adding some kind of guaranteed-income option to their 401(k) plans.
"We have this huge drop in the equity markets and individuals aren’t going to retire when they planned to," says Bob Liberto, a consultant with Segal Advisors. "Those organizations looking at the annuity accumulation feature are doing it to make sure that their workforce planning comes to fruition."
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