Choosing an annuity for a 401(k) plan can be tricky
A fiduciary safe harbor provided in the SECURE Act encouraged the use of annuities in retirement plans. But a recent report shows annuity costs and payouts change frequently, so plan sponsors must shop carefully, George Moriarty reports.
Transcript
[GM] Welcome to By The Numbers, I’m George Moriarty. This time we are continuing our retirement series with a look at annuities, specifically, annuities have entered the retirement plan sponsored space.
Since the 2019 Secure Act gave plan sponsors a Fiduciary Safe Harbor that afforded them some protection from liability, if they go through the necessary steps of properly vetting insurers and annuities.
According to an analysis by David Blanchett, Morningstar Investment Management’s head of retirement research, Michael Finke, a professor of wealth management at the American College of Financial Services, and Branislav Nikolic, Vice President of Research at CANNEX Financial Exchanges, it’s easy to choose annuity providers based on price and pay out rates. But those costs and rates can change frequently, so the options that are best today might not be as good in several years.
The research examined weekly, life-only annuity pay out rates from 30 insurers between November 3rd 2013 and August 12th 2020. The authors found that the average cost of choosing a single cost annuity provider was 4% during that time frame. Although, the cost was more than 9% for some insurers and as high as 12% for certain ages and household types. That range indicates that plan sponsors must evaluate multiple annuity providers over time rather than simply selecting the lowest cost provider today.
Notably, the paper did not include data for guaranteed lifetime withdrawal benefits. Those are the optional living benefits riders sold alongside annuities. These products, which have a presence in some defined contribution plans, do not change prices or rates as frequently as deferred income annuities and single premium immediate annuities, Blanchett noted.
[David Blanchett] So annuities with guaranteed lifetime withdrawal benefits that do have some kind of presence in defined contribution plans tend to have more static pricing than other annuities such as single premium annuities or deferred annuities.
[GM] Now let’s talk returns. A recent report from the Center of Retirement Research at Boston College found that expected returns from annuities on average has changed little over the past 25 years. That paper examined the “money’s worth’ a 65 year old would get from immediate annuities, fixed annuities, and deferred annuities without payouts beginning at 85
Deferred annuities had an average expected return of about 50% per dollar of premium. But, they also had considerably higher insurance values than immediate annuities. This is all according to the report.
So what to make of of this all?
Annuities have always been challenging products and we won’t get into why right now, but the pursuit of lifetime income is at the forefront of retiree and pre-retiree thinking right now.
Therefore, annuities should remain in the conversation and evaluation practices have to evolve as well.
That’s it for today. Thanks for watching and I’ll see you on the next By The Numbers.
