Lifetime income options grow

As many plan executives continue sitting on the fence about adding lifetime income options in their 401(k) plans, the market for such products continues to grow.

The latest entrant is Hartford Financial Services Group Inc. Unlike some of its competitors, Hartford Financial, Hartford, Conn., isn't using target-date funds, and it isn't using guaranteed minimum withdrawal benefits.

Instead, Hartford Financial allows participants to buy “retirement income shares” through their 401(k) plans in increments of $10 per share, building up a foundation whose monthly post-retirement payout depends on how much they invest. They can buy shares through regular payroll deductions, exchanges from other investment options in their 401(k) plans or rollovers from other retirement plans. There is no minimum or maximum amount.

Hartford Lifetime Income is a fixed deferred annuity that assumes the participant will retire at 65. The retirement shares are invested in an annuity held in the general account of Hartford Financial, and the amount that is accumulated is then paid out monthly at retirement.

Hartford Financial's effort is another illustration of providers trying to distinguish themselves from peers, at a time when many 401(k) plan executives aren't buying what vendors are selling.

“When it comes to lifetime income today, there's a feeling on the part of sponsors that there is more risk in doing something than in doing nothing,” said Ross Bremen, a partner in investment consultant NEPC, Cambridge, Mass. Like the other consultants interviewed, Mr. Bremen said he would not comment on specific products.

Mr. Bremen likened the current market for lifetime income options to that for auto enrollment before the passage of the Pension Protection Act of 2006. “There was a concern from a fiduciary perspective about whether this (auto enrollment) was a safe thing to do,” said Mr. Bremen, noting that some plans did offer auto enrollment before 2006. “After PPA, certainly (more) sponsors felt more comfortable in pursuing auto enrollment and auto escalation

Mr. Bremen said most large plans will hang back until the Labor Department offers more guidelines on lifetime income options. “If sponsors feel more comfortable from a fiduciary perspective, it could be a catalyst for innovation and adoption,” he said.

“It will be a very slow and evolving market without the DOL,” added Robyn Credico, the Arlington, Va.-based senior consultant and defined contribution practice leader for North America at Towers Watson & Co. Even if the DOL provides “helpful” guidance, she predicts plans with fewer than $50 million in DC assets would adopt the lifetime income options faster than would larger plans.

It's easier for smaller plans because “their record-keeping services are often bundled with the insurance company offering the service,” she said. “Also, the financial advisers for these plans are more likely to recommend a lifetime income solution if there is more fiduciary protection for them and their clients.”

Hartford Financial started conducting research in 2006 and looked at several product designs and payment-distribution strategies. The research showed that participants wanted income guarantees.Executives settled on income shares as the easiest for participants to understand and for plans to administer, said Patricia Harris, assistant vice president in Hartford Financial's retirement plans group in Simsbury, Conn.

The income shares concept “was the most powerful element in our design,” said Ms. Harris, who created the offering that the company has patented. Hartford Financial chose a deferred fixed annuity to insulate participants' retirement income from market risk, she said. The income benefit is guaranteed by Hartford Life Insurance Co.

Hartford Lifetime Income will be marketed first to new clients because “it was the fastest way to get it on the market,” Ms. Harris said. Next year, the company plans to sell it to existing clients. Company spokesman David Potter said Hartford Financial would not be able to make the lifetime income option available to its own 401(k) plan until it is offered to existing clients. The 401(k) plan had $2.66 billion in assets as of Sept. 30, 2010. Among Hartford Financial's 33,444 retirement-plan clients, 99% have DC assets under $25 million, Mr. Potter said.

Although some big DC plans, such as United Technologies Corp. and Prudential Financial Inc., have embraced lifetime income options, most early adopters are small.

“Plans in the $20 million and under range seem to be the most receptive,” said Christopher Lyon, a partner at Rocaton Investment Advisors LLC, Norwalk, ConnMr. Lyon said some lifetime income option offerings have been undergoing design changes to address plan executive concerns about administration, record keeping, portability and insurance risk. “There will be a greater range of choices in the future,” said Mr. Lyon. “The jury is still out on which will be the predominant model. Eventually, the market will shake out a little.”

Hartford Financial officials contend their offering addresses concerns such as flexibility and portability. For example, participants can cash out their income shares before income payments begin and exchange the value of shares for other plan options.

If a sponsor hires a new record keeper that doesn't accept the lifetime income option, Hartford Financial will continue to administer the income shares and provide continuing tax reporting and record keeping. If participants change employers, they can keep their lifetime income balance in the former employer's plan if permitted, or they can receive an annuity income share certificate from Hartford Financial to eventually initiate income payments.