Sponsors returning to questions about in-plan annuities

One year after the SECURE Act addressed a major roadblock to defined contribution executives offering in-plan annuities, some sponsors — as they try to recover from the impact of the coronavirus pandemic — are trying to regain the momentum of investigating if these options make sense for their participants.

The coronavirus played a major role in diverting executives' attention from an already-complex plan design concept. Some recent research suggests that in-plan lifetime income options remain a tough sell to sponsors and to participants. Other surveys cite some interest, but they cannot tell if the intensity of the interest — ranging from "very" to "somewhat" — would forecast action.

The SECURE Act "isn't answering all of the questions and it's not solving all of the problems" for the use of in-plan annuities within DC plans, said Shawn O'Brien, senior analyst for Cerulli Associates, Boston. "It is taking a while for certain product providers and sponsors to get more comfortable."

Signed by President Donald Trump in December 2019, the Setting Every Community Up for Retirement Enhancement Act provided a fiduciary safe harbor for DC plans that offer in-plan annuities if an annuity provider were to fail.

Among other things, the law protects sponsors if they obtain "written representations" from an insurer or other provider affirming their financial health.

Sponsors aren't required to conduct their own evaluations of an annuity provider's financial health. The law allows sponsors to use many criteria in selecting a provider and it doesn't require them to choose the lowest-cost provider.

"We saw a lot of activity in January and February but then everything froze," said Michael Kreps, a principal at Groom Law Group, Washington, describing discussions with clients about in-plan retirement income options.

Although the SECURE Act addressed insurance credit risk, sponsors still must wrestle with issues such as cost and type of products to be offered. "It takes a while to clear all the hurdles," such as whether the cost justifies the usage, Mr. Kreps said.

"It's tough to make plan improvements when you are dealing with furloughs or staying in business" due to the economic impact of the coronavirus, he added.

Larger plans will be more likely to consider in-plan options, Mr. Kreps said.

"We were having a lot of robust conversations until March," said David Ireland, global head of defined contribution for State Street Global Advisors, Boston.

"Then the focus shifted for all retirement plans away from future enhancements." Even under the best circumstances, however, "it's hard work to implement these kinds of solutions," he said.

Despite the safe harbor, sponsors still have qualms about in-plan lifetime income options.

In a survey to be published in late January or February, T. Rowe Price Group Inc., Baltimore, found that 61% of 122 sponsors said the SECURE Act had not "helped motivate" them to add or consider retirement income solutions, but 22.1% said the law's safe harbor provision did help motivate them to add or consider these options. The survey was conducted in October. The biggest impediments to action were litigation risk (33% of 128 respondents); lack of clarity as to what features or options are best for their participants (32%); and concern about additional costs (27%).

"Retirement income is going to be a phase-in process" for sponsors, said Lorie Latham, T. Rowe Price's Charlotte, N.C.-based senior defined contribution strategist. "There might have been some momentum prior to the pandemic."

Ms. Latham said the word "annuity" still has a negative connotation. She recalled a T. Rowe Price focus group last year in which the participants were asked if they preferred a guaranteed income or a managed payout. The results were about 50-50. When the word "annuity" was substituted for "guaranteed income," the "managed payout" option received the most votes.

Another T. Rowe Price survey of DC consultants, published in November with the Schaus Group LLC, a defined contribution consulting firm, said in-plan annuities ranked low as appealing to sponsors and participants.

The survey polled 20 DC consultants that represent more than 5,500 plans. The survey took place from early January to mid-February and again in April. When asked what changes the SECURE Act was "most likely to bring about," adoption of-in plan annuities by sponsors and use by participants ranked low, said a survey report.

The report said:

• On a scale of 1 (least likely) to 4 (most likely), the statement "more plans will offer in-plan annuities" scored 2.6 and the statement "more participants will use in-plan annuities" scored 2.1, the lowest score among seven choices.
• When given eight choices for identifying factors that would influence offering a qualified default investment alternative, DC consultants said the choice of incorporating annuities, managed payouts or other lifetime income products in the QDIA ranked last.
• When asked what strategies sponsors should consider "to help participants through their retirement," adding an out-of-plan annuity option ranked eighth of nine choices and adding an in-plan annuity option ranked last.

"We aren't seeing a lot of adoption of lifetime income solutions," said Alison Borland, the San Francisco-based executive vice president of wealth solutions and strategy at Alight Solutions, referring to a survey of plan sponsors to be published in mid-January. Twelve percent of respondents said they already offered an in-plan annuity option, but the survey didn't ask when they offered it. The survey reported that 3% said were "very interested" in offering in-plan annuities, while 49% were "moderately" interested. Thirty-seven percent weren't interested.

The major reasons for not adopting annuities were "fiduciary concerns" (50% of respondents); operational or administrative concerns (47%); and participant utilization concerns (43%). Multiple responses were allowed.

The survey, conducted in the fall, was not restricted to Alight's clients. It covered 116 employers with more than 5.5 million workers.

Despite the delays and setbacks, some industry members said retirement income is back on the radar of sponsors, at least for exploring options.

"I see the momentum already shifting back," SSGA's Mr. Ireland said. "Next year, we'll be back to pre-pandemic" marketplace interest.

Some clients "are evaluating income options for their plans and we've been asked to respond as a potential service provider," he added.

Despite the "retirement income tsunami that never was" after passage of the SECURE Act, "maybe there are small waves," said Robert Melia, the Stamford, N.Y.-based executive director of the Institutional Retirement Income Council, which provides information on best practices, regulation and legislation to DC sponsors and consultants. Although the coronavirus put retirement income "on the back burner" for sponsors, "it will slowly pick up in 2021 and 2022," he predicted.

Annuities embedded in DC plans will give participants a better opportunity than individual retail annuities because "there is no commission that the retail market has built in," he said. "The efficiency of the defined contribution market drives down cost."

Mr. Melia said in-plan annuities in DC plans can be more attractive than retail annuities in a low-interest-rate environment. In DC plans, participants will make investments over time, for example in a target-date fund, in a form of dollar-cost averaging so that "you are buying income over different interest rate environments," he said.

Ongoing contributions in a DC plan — opposed to a one-time purchase of a retail-market annuity — "gives the defined contribution plans a leg up" and puts participants in "a better position to diversify the risk in a low-interest-rate environment," he said.

Willis Towers Watson PLC sees some gradual improvement in plans' approaches to in-plan lifetime income.

In 2017, a company survey reported that 7% of respondents offered or were interested in these options. In a survey published in December 2020, the company said 16% of respondents now offer these options, 2% are planning to offer them in 2021 and 13% are considering them for 2022.

Still, 69% had no interest among the 464 U.S. employers who were surveyed in September. The survey didn't ask when sponsors offered the options.

"A lot" of clients in the first quarter of 2020 were questioning whether they had the right QDIA for their participants, said Dana Hildebrandt, the company's New York-based investments director said. "This led to an expansion of the discussion about lifetime income solutions," she said.

The discussions weren't restricted to in-plan annuities. "You want to make the discussion as broad as possible," she said.

The SECURE Act "removed a major issue," said Ms. Hildebrandt, exhorting sponsors and providers to increase participant communications "to make them more comfortable" about lifetime income options.