For defined contribution plan executives, retirement income products are plagued by a cloud of uncertainty about cost, structure, liquidity and complexity, says the latest annual survey of DC consultants by PIMCO.
The concerns come at a time when retirement income is the fastest-growing priority among sponsors and the fastest-growing service offered by consultants, said the annual survey, published June 15. Newport Beach, Calif.-based Pacific Investment Management Co. LLC surveyed 27 DC consulting and advisory firms serving 3,500 clients with approximately $4.3 trillion in plan assets.
Sixty-seven percent of respondents cited costs when asked what may stop clients from offering in-plan insurance products such as annuities. In last year's survey, costs ranked second at 38%.
The results are instructive because sponsors have long argued that plans' use of annuities and other insurance-based products have been thwarted by what they said was inadequate liability protection if their chosen insurer couldn't deliver on its promises or went bankrupt.
They got that protection with the December enactment of the Setting Every Community Up for Retirement Enhancement Act of 2019, known as the SECURE Act.
The law protects sponsors if they obtain "written representations" from an insurer affirming its financial health and meeting reserve requirements in states where it conducts business. Sponsors also can use many criteria in choosing an insurance provider, and they aren't required to hire the lowest-cost provider.
However, the law's passage seems to have exposed — or even accelerated — a host of other worries.
"The SECURE Act doesn't address all the issues," said Richard Fulford, PIMCO's executive vice president and head of U.S. defined contribution. "The SECURE Act took away the most obvious hurdle. There are a lot of items that need to be addressed."
The lack of protection — "insufficient government support" — was the sponsors' top concern (by 41% of respondents) for offering in-plan annuities in last year's PIMCO survey. In the latest survey, "fiduciary concerns," a reworded question referencing the SECURE Act, received 26% of respondents' votes, placing eighth of nine choices. (Many of the survey questions allowed multiple responses.)
Although the expected cost of annuities and other in-plan insurance products surged to the top of sponsors' lists of concerns, several other issues relating to these products rose in importance vs. last year's survey:
- The lack of liquidity and control jumped to 41% — ranking second — from 31% as a reason consultants believed clients might avoid these products.
- In third place this year, lack of participant demand rose to 37% from 31% last year.
- Perception of added liability, which ranked fourth, was cited by 33% of respondents, down from 34% last year.
- Operational complexity jumped to 30% — in fifth place this year — from 13% last year.
"Annuities have been available for years and years, but there hasn't been a high adoption rate," Mr. Fulford said.