Lifetime income options in 401(k) plans haven't gained much traction to date, but the move by one multi-billion-dollar plan sponsor to offer annuities to its participants could portend a warming to these sorts of products in the marketplace.
Only 8.5% of 401(k) plans offer lifetime income options to participants, according to the Plan Sponsor Council of America. Figures from a recent Towers Watson lifetime income survey paint a similar picture — only 12% of plans offer such options. That number, though, is up from 6% in 2012.
Some of the largest 401(k) plans in the country are beginning to add access to such features, a move that some advisers say is an affirmation to other sponsors and advisers that they should at least consider the viability of such insurance products.
Car-manufacturing behemoth General Motors, for example, recently took the plunge. The company, which has approximately
$11 billion in assets and 58,000 participants in its 401(k) plan, adopted Hueler Companies Inc.'s Income Solutions Annuity Marketplace, a platform that allows participants to partially annuitize their defined contribution portfolio by having insurers bid for their business.
Through Hueler's platform, insurers provide participants with real-time quotes for products and how much monthly income they can expect. Once a participant selects a product, they roll the assets used to purchase the product into an individual retirement account with their selected insurance provider. The rest of the participant's assets typically stay in their DC plan.
Insurance products provided through Hueler's platform include deferred income annuities such as qualified longevity annuity contracts (QLACs). Variable annuities are not offered, as it is too difficult to standardize their features, according to Kelli Hueler, the chief executive of Hueler Companies.
“[GM's decision] is a huge signal,” said Barbara Delaney, principal at StoneStreet Advisor Group. “It shows the market that this is a needed product out there.”
Ms. Delaney, who uses the Hueler annuity platform with a few of her larger retirement-plan clients, said that advisers should be taking a more active role in seeing which lifetime income options are available and should be instrumental in developing strategies to help participants generate retirement income. The need is especially urgent as huge numbers of baby boomers transition into retirement, she added.
GM is by no means the first mega-sized DC plan to adopt a lifetime income option.
IBM, which has
$48 billion in assets in its 401(k) plan, the largest in the country, started using the Hueler platform a decade ago.
United Technologies,
one of the largest plans in the country, incorporated annuities into its plan a few years ago
through a separate platform.
Trends in the DC market tend to start among the largest plans and work their way down market, according to Lorie Latham, director at Towers Watson Investment Services.
“I think that all plan sponsors pay attention to what the
market trend is, and as we see large plans make big decisions, it can definitely sway the market and impact how they evaluate [various options] and what they consider,” Ms. Latham said.
Policymakers have notably aided the uptake of lifetime income products in defined-contribution plans. In July of last year, the Treasury Department issued rules
allowing use of qualified longevity annuity contracts, a type of deferred income annuity, in 401(k) plans. A few months later, the Treasury Department approved the use of annuities within target-date funds.
As defined benefit pension plans are replaced by DC plans as the primary retirement-savings vehicle for Americans, there's a greater need for DC plans to be able to generate a guaranteed income stream, advisers said.
Timothy Black, principal at Black Diamond Advisory Services, also said that he believes adoption of lifetime income products will trickle down from the larger plans such as GM to smaller plans. However, he doesn't see it yet as a movement that will occur overnight because of the barriers that some sponsors perceive, such as additional administrative duties and low participant demand. Indeed, the Towers Watson survey indicated these were two of the primary deterrents for sponsors.
Regardless of GM's decision, lifetime income is “a very hot topic” that has been generating a lot of interest in the retirement market, said Robert Scherzer, president at Ridge Retirement Consultants.
“I don't think GM per se will accelerate adoption,” he said. Although Mr. Scherzer doesn't use any lifetime income products with his own clients, he has been in active discussions about them with various providers.
