Wells Fargo on Thursday began offering a fiduciary service for retirement plans that pairs its target-date series with qualified longevity annuity contracts.
That product, Wells Fargo Retirement Income Solution, follows the recent passage of the SECURE Act, which contained several provisions designed to increase the use of annuities within defined-contribution plans.
But the annuities Wells Fargo will recommend as part of its service are not in-plan. However, that aspect solves the portability issue that has discouraged plans from including annuities in the past, said Nate Miles, head of retirement at Wells Fargo Asset Management.
“It creates a lot more portability for the plan sponsors. They’re not having to hold that annuity in-plan,” Miles said.
The service does not automatically default participants into an annuity at retirement. Rather, participants who are in the product have the choice at age 65 of either keeping all of their plan assets in the target-date series’ retirement fund or shifting 15% to the annuity and leaving 85% in the retirement fund. That annuity begins making payments at age 85.
“Both plan sponsors and participants have been looking for these types of solutions,” Miles said. “It has to be simple for participants. For us, that means it has to be part of the default fund.”
The default is a Wells Fargo target-date collective investment trust, rather than one of the company’s lines of target-date mutual funds.
Wells Capital Management acts as a 3(38) fiduciary under the Employee Retirement Income Security Act, meaning that it has full discretion to select annuity providers. The company is leaning on the “safe harbor” for insurance company selection outlined by the SECURE Act, which has been anticipated to get more plan sponsors interested in annuities.
So far, the company has not selected any insurers that will provide the qualified longevity annuity contracts, Miles said. Eventually, the service will likely include at least several insurers whose products it will choose from, he noted.
The design has at least two potential benefits to retirees, according to Wells Fargo. It helps ensure that they do not totally run out of savings after age 85, and encourages them to spend at least some of their savings after age 65.
Often, savers can be hesitant to spend down assets early in retirement, leaving accounts virtually untouched, except for required minimum distributions, largely due to inertia, Miles noted.
By giving participants a decision to allocate 15% of assets to the annuity — rather than as much as 100% — the service hopefully will not scare participants away, he said.
“If we force them to annuitize 100% of their assets at age 65, they’re not going to do it,” he said. In that case, participants would be more likely to make a roll over and put off decisions about buying annuities, he said.
Wells Fargo’s service is targeted at plans with $50 million or more in assets, though it is available to smaller plans as well, he said.
The cost of the annuity selection service is built into the plan option, according to Wells Fargo. The firm described the service as low-cost but declined to provide specific figures on fees.
DC plan sponsors have not widely moved to include annuity options, despite a safe harbor issued several years ago by the Department of Labor. The SECURE Act more clearly outlined practices that can help sponsors limit their fiduciary liability associated with annuity selection.
A considerable proportion of 401(k) savers in interested in the products, according to results of a March survey commissioned by Allianz Life.
That survey, which included 558 people in employer-sponsored plans, found that 77% would consider options that include guaranteed lifetime income, though a smaller percentage, 59%, specifically said they were interested in annuities.
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