Several money managers are scrambling to design investment options embedded with annuities or income guarantees in what they hope will be the next major evolution in defined contribution plans.
So far, though, they're having a tough time winning over clients. But the timing should be perfect. With 401(k) and other DC plans now the main retirement vehicle for many workers, the industry has been shifting away from focusing on asset accumulation to retirement income and the distribution phase. Plus, last year's market collapse further highlighted the need for plans to better protect assets, particularly for those participants at or near retirement.
As a result, several investment-only DC service providers — including UBS Global Asset Management, AllianceBernstein LP, Putnam Investments and Barclays Global Investors — have launched or are developing strategies within investment plan options such as target-date funds that annuitize or guarantee a portion of participants' assets to provide steady income.
For several years, insurers have offered annuities as a standalone investment option, but few plans bought what the insurers were selling. Now, investment-only service providers are trying to crack the market by teaming up with insurers to offer guaranteed income embedded in another investment option.
But industry experts say DC plan executives, along with their consultants and some large record keepers, are reluctant to get behind such solutions, citing legal and fiduciary hurdles and cost concerns. Some even wonder if there is participant demand for such strategies.
“Adding income solutions to DC plans makes perfect sense, but the details are the biggest challenge,” said Sue Walton, senior investment consultant at Watson Wyatt Worldwide in Chicago. “What are the fees? How do you solve the portability issue? Are we comfortable as fiduciaries signing off on long-term guarantees with one insurer? It's the topic de jour right now, but the industry needs to answer some of these questions before it will go anywhere.”
Keith Overly, executive director of the $6.8 billion Ohio Public Employees Deferred Compensation Program, Columbus, agreed the idea of adding a guaranteed income option to target-date funds or other investment options is “good in theory,” but “there are certainly many details to consider, including fees, how the product is structured, and whatever terms and conditions apply if a plan wishes to terminate a manager and discontinue the guaranteed income product.”
Tobi Davis, retirement plans and cash manager at Playboy Enterprises Inc., Chicago, which has an $87 million 401(k) plan, said “it's a bit early” for DC plan sponsors to adopt guaranteed income solutions. “There aren't enough products in the marketplace and we don't yet have a good feel for the cost structure,” she said. “Time will tell.”