SAN FRANCISCO — Barclays Global Investors wants to turn the employer match in 401(k) plans into an annuity with capital appreciation to boot.
Most employer matches still are made in employer stock, and often employees leave that match untouched.
By offering an annuity as part of a multipart fund called SponsorMatch, BGI officials say that a participant spending his or her career at one employer could generate about 40% of pre-retirement income, going a long way toward meeting retirement goals. Adding in employee deferrals and other personal assets such as housing and cars, employees could reach desired retirement income goals of 75% or 80% of pre-retirement income.
Annuities have thus far proved a tough sell to DC plan executives. BGI officials have developed a novel way of mixing them together while trying to capture global market returns and enhanced alpha, designed as the default option for the company match. The fund:
• invests in a deferred annuity portfolio to provide an income stream;
• offers an index portfolio to capture market returns; and
• provides an institutional mutual fund portfolio that diversifies and gives enhanced return potential.
Matthew Scanlan, managing director and head of BGI’s Americas institutional business, told a news conference the product “will be one of the revolutionary technologies that changes the complexion” of defined contribution investing.
BGI last week filed for 14 patent claims on the process, Kristi Mitchem, managing director and head of BGI’s U.S. defined contribution group, said at the press briefing.
‘A different way’
Scarlett Ungurean, a consultant with Mercer, Chicago, said that while BGI’s product does not have a guaranteed provision, it makes sense to offer it. “Everyone is focusing on the spend-down phase. BGI is coming up with a different way of looking at retirement-income investing,” she said.
While retirement-income investments have been all the rage in recent years, annuities in DC plans have garnered lackluster interest from 401(k) plan executives since their introduction in 2004. BGI is trying to make investments in annuities more attractive, while at the same time making sure the option will pass muster with the Labor Department as a qualified default investment alternative.
The Pension Protection Act of 2006 encourages automatic enrollment in DC plans, and the Department of Labor is expected to finalize regulations this month that name target-date funds, balanced funds and managed accounts as appropriate default options. SponsorMatch falls into the target-date category, Ms. Mitchem said in an interview.
SponsorMatch, she said, makes retirement income a priority from the first day a participant joins a DC plan. Participants not choosing their own options default into SponsorMatch.
Unlike a typical target-date fund, when the SponsorMatch fund matures, participants get annuity payments from age 65 until death. The annuity allocation starts at 5% at age 25 and grows to 53% at retirement. Participants can use the balance of their portfolio to increase their annuities or “spend it on a new boat,” Ms. Mitchem said at the briefing.
Ms. Mitchem declined to name the insurance company that will run the annuity portion of the investment option.
BGI, San Francisco, will charge a flat 85 basis points for SponsorMatch, a fee on par with target-date funds and managed accounts for DC plans.
Defined contribution plan consultants say products like SponsorMatch are likely to catch on because they aren’t straight annuity options and only involve the company’s matching contribution, rather than the participants’ contributions.
Still, that acceptance is not likely to come quickly.
Difficult concept
Ron Eisen, president of Investment Management Consultants, Portland, Ore., said while every major provider is trying to incorporate retirement-income principles into investment products, it is not an easy concept to get across.
“Everyone is working in that space. There are more people right now in insurance kitchens trying to hedge longevity risk than ever before. But, if you’re looking for the needle to move the first or second year, it won’t,” said Mr. Eisen.
“What you’re seeing now, from BGI and others, is manufacturing occurring in advance for the upcoming demand. These products are going to be really important, but it’s not happening as fast as people thought,” he said.
What BGI has created sounds unique, Mr. Eisen said, adding that whenever you throw annuities in the mix, it’s more difficult to sell to plan executives. “This may be a slightly easier conversation,” he said.
Ms. Mitchem acknowledged Mr. Eisen’s point.
“Annuities have been challenging to sell to participants and sponsors. With SponsorMatch, BGI is sitting in between the participant and the insurance company. Most of the products out there have been insurance company products,” she said.
William Schneider, managing director of DiMeo Schneider & Associates LLC, Chicago, said longevity investing has been met with some apprehension from plan executives.
Defined contribution plan officials want something easy to understand that won’t lock participants in, Mr. Schneider said. He said BGI’s new program might do just that.
Many plan executives want to move money out of company stock that had been part or all of the employer match, and SponsorMatch accomplishes that, Ms. Mitchem said.
“We want to get more mileage out of the company match, which historically has beeninvested in company stock, cash or cash equivalents or investments that mirror participants’ own elections. There are clear drawbacks there. For an employee that is heavily concentrated in company stock, they are fortunate if they’re at Microsoft, but (not) if they were in Enron,” said Ms. Mitchem.
As for cash, “it’s a secure investment vehicle, but it’s not consistent with a 401(k) plan growing over time.”
“Participants have been ineffectively investing their own money. They don’t always make prudent decisions. And since 30% to 50% of a participant’s balance can come from the employer match, we need to find a better way to invest that money,” she said.
Liquidity concerns
Annuity-type products have also been challenging to sell because plan executives are concerned about liquidity and participants leaving the plan early and taking a loss.
BGI will integrate SponsorMatch with record-keeping platforms to allow for daily liquidity, said Ms. Mitchem.
“When a participant leaves, they could leave their balance in SponsorMatch. If they are moving over to another company, they could sell it for cash. We are marketing this as a form of a commingled trust fund, and the record-keeping community is familiar with that,” said Ms. Mitchem.
“We will be going out on the road with this product to all the major record keepers. I don’t imagine a problem getting this product on their platforms,” she said.
Ms. Mitchem said BGI expects to start taking money into SponsorMatch in the second half of 2008.
Competitors are confident with their own products, but think BGI’s new strategy is interesting.
Jody Strakosch, national director for MetLife Inc., New York, said the company’s Personal Pension Builder annuity product, which Merrill Lynch Retirement Group distributes, is very different from the BGI product. MetLife is not working on a similar product, she said.
Douglas McIntosh, vice president of retirement income distribution for Prudential Retirement, Newark, N.J., said BGI’s product sounds a bit similar to Prudential’s IncomeFlex option. “Imitation is the sincerest form of flattery. I applaud them for joining the fray,” he said.
Plan executives contacted for this story also said BGI’s new fund sounds intriguing.
Robert Hunkeler, vice president of investments at International Paper Co., Stamford, Conn., said BGI’s concept sounds more user friendly than simply offering an annuity option.
“It’s an extremely tough thing to communicate (annuities as an investment option) to employees,” he said.
“Some providers have decided to spread a decision over a longer period where you are working your way into the annuity over time. It sounds like a good idea. It sounds different,” Mr. Hunkeler said.
