NEW YORK — The Retirement Group at Merrill Lynch has joined with Metropolitan Life Insurance Co. to bring 401(k) plan participants a fixed, deferred group annuity investment option called Personal Pension Builder.
While New York-based MetLife offers the product to employers on a voluntary after-tax basis, Merrill Lynch, also of New York, designed its product so that it is ERISA-eligible and can be funded with pre-tax dollars put into a 401(k) account.
"The biggest challenge we had was designing a product that would fit within ERISA," said Ron Albahary, chief investment officer of Merrill's Retirement Group. "Employers can include it (Personal Pension Builder) as another investment option in a 401(k) plan," he added.
"We've created an accumulation vehicle within a 401(k) plan where a person can build their own defined benefit plan," said Mr. Albahary. "For every dollar that a plan participant puts into PPB they get a specific future income benefit through a deferred fixed annuity product," he added.
Mr. Albahary said in a recent national survey conducted by Merrill Lynch, two-thirds of workers contributing to a retirement plan said they prefer investments that pay a regular, set dollar amount throughout retirement.
The PPB accumulation phase offers three guarantees:
&bul;a specific future income benefit amount (similar to a defined benefit plan) purchased at current prices;
&bul;income they (plan participants) accumulate for retirement that's guaranteed for life or a period of their choice based on the annuity purchase rate (including interest rate) being offered by MetLife on the date a contribution is made; and
&bul;the beneficiary's death benefit equal to the value of the annuity if the employee dies during the accumulation period. Or, a beneficiary can elect to convert that value to an annuity.
The product also gives 401(k) participants the ability to reduce interest rate risk by averaging purchase rates over time, since each contribution pays for future income participants will get at retirement, based on the then-current interest rate. It also has the flexibility to adjust contributions and make lump sum transfers from other 401(k) options to ensure the desired level of income at retirement.
Mr. Albahary said the future income stream depends on the income benefit, or interest, rate prevailing in the market at the time contributions are made to the product, which is determined by MetLife.
"It also allows (401(k) plan participants) to use a dollar-cost-averaging strategy; as interest rates go up (participants) will benefit from higher rates," he added.
Mr. Albahary said that MetLife "is going pretty far out on the yield curve" to determine the interest rate paid on the annuity, offering a good deal for participants.
An online calculator will be offered by Merrill Lynch so participants can determine their income depending on how much they contribute from each paycheck, according to Mr. Albahary.
The employee is guaranteed a minimum interest rate of 3% on the investment, increasing as interest rates rise. "Over a long period of time there will be different interest rate environments," said Mr. Albahary.
Merrill Lynch plans to educate 401(k) participants about the new product through its online advice product.
Mr. Albahary believes it will be easy to explain the product to plan participants. "You just tell participants that every dollar they put in turns into a guaranteed income stream at retirement," he said.
There is a lot of interest in the new product by 401(k) sponsors, according to Mr. Albahary. "We've talked to many of our existing clients and many of them are interested," he said; Mr. Albahary would not identify any of those clients.
Mr. Albahary said he expects PPB to become an investment option in some clients' 401(k) plans later this year.