Where do annuities fit in?

The retirement planning landscape is evolving rapidly, and one area gaining significant attention is the decumulation phase – how individuals manage their assets and ensure long-term income after retirement.

Nate Moody of Lebel & Harriman Retirement Advisors explains that traditionally, the industry has focused heavily on helping people save for retirement, with less emphasis on the distribution phase.

“We get people to retirement,” he says, “and then as soon as they retire, we kick them out of the plan and say good luck.” This has left many retirees struggling with questions about how much they can withdraw each year and how long their savings will last.

One major innovation addressing this issue stems from the SECURE Act 1.0, which created a safe harbor for plan sponsors to add in-plan annuities, offering several advantages.

“When people hear annuities, the hair on their neck kind of stands up,” Moody acknowledges. But the inclusion of annuities within retirement plans can provide key benefits, such as fiduciary oversight, lower fees due to institutional pricing, and improved portability. This increased scrutiny ensures that annuities are only used when in the best interest of the client.

However, Moody points out that the industry is still grappling with where these annuities should fit into the retirement plan structure. He highlights three main options being explored:

1. Target date funds: These are popular, with approximately 80 percent of plan participants choosing them. The advantage is simplicity, but the downside is a lack of customization. “Not every 65-year-old is the same,” Moody explains, “and their demands for guaranteed income can differ quite significantly.”
2. Managed accounts: Offering greater personalization, managed accounts tailor investment strategies based on an individual’s specific circumstances. However, they typically come with higher fees and require active engagement from the employee. Unfortunately, Moody notes, “most employees nowadays are extremely disengaged.”
3. Annuities as a distribution option: This solution operates much like a traditional pension, allowing retirees to take their savings either as a lump sum or as a stream of income. Large record-keepers like Fidelity are pushing this model. However, Moody warns that this approach can be subject to market timing risks and requires significant education for employees to understand how it fits into their overall financial picture.

Beyond these immediate developments, Moody sees a broader shift in the retirement and wealth-management industry. Historically, wealth management has relied on an asset-gathering model, in which advisors encouraged clients to roll their 401(k) assets into an IRA and charged a one percent management fee. But this model is being disrupted.

“What you’re going to start to see is assets remaining in retirement plans throughout retirement,” he predicts, citing reasons such as lower fees due to economies of scale and the availability of more complex investment products like annuities within the plan.