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GFOR: Adding annuities to DC plans still open to debate

Kathleen Lutito
Kathleen Lutito

The environment for incorporating annuities into defined contribution plans remains uncertain for sponsors and participants because of many risks and not enough offerings that meet the goals of providing security at an acceptable price, several DC plan researchers, sponsors and regulators said Monday.

The challenges include investment risk, income risk, capital market volatility, longevity risk and inflation risk, said Olivia Mitchell, executive director of the Pension Research Council and a professor at the University of Pennsylvania’s Wharton School.

Ms. Mitchell was the moderator of a panel discussion on DC plans and annuities at the Global Future of Retirement conference in New York sponsored by Pensions & Investments.

Hillary Bolton, a senior managing director for Janus Capital Group’s institutional defined contribution business and head of U.S. consultant relations, said her review of research on retirement savings suggests that so-called in-plan annuities aren’t a good idea for people age 55 and older.

“Today, I don’t think annuities are affordable” for older people, Ms. Bolton said. Viewing several sets of research, she said one found the annual annuity amount for someone age 55 to 64 was $6,422 based on a median retirement account balance of $76,381. For people 65 and older, the annual annuity was $3,547 based on a median retirement account balance of $72,957.

“It’s a tough sell to tell them to annuitize those account balances,” Ms. Bolton said.

Citing other research that found only 17% of retirees have more than $100,000 in retirement assets, Ms. Bolton said “we need more creative solutions” than annuities.

Decumulation strategies need to combine growth and income for retirement, Ms. Bolton said. Other components of these strategies are defensive equities, tail hedging, volatility management and diversified inflation protection options.

One company, CenturyLink, hasn’t incorporated annuities into its defined contribution plan because it doesn’t have to, said Kathleen Lutito, president and chief investment officer of CenturyLink Investment Management, which manages various employee retirement and benefit trusts for the CenturyLink telecommunications company.

The reason: More than 90% of participants over age 55 in the company’s 401(k) plan also are participants in the frozen $12.6 billion CenturyLink defined benefit plan. “We have time to let the (annuity) market evolve,” said Ms. Lutito, noting “younger, shorter service employees have minimal or no pension benefit.”

The 401(k) plan has $5.6 billion in assets. Eighty percent of participants leave the plan within 18 months of retiring. CenturyLink’s distribution options are a lump-sum payment or installment payments, and the company provides retirement income projections to employees.

Ms. Lutito said company executives have debated whether to make greater efforts to educate employees about keeping the retirement savings in the plan after they retire and about calculating spending in retirement.