(PlanSponsor) - Annuities deserve a fresh look from plan sponsors, according to retirement industry veterans with years of experience in retirement income strategies.
Despite product innovations and improvements, the perception of annuities among many plan sponsors is stuck in the past, says Rona Guymon, senior vice president of annuity distribution, at Nationwide Financial. The persistence of myths and misunderstandings about annuities are likely holding back greater adoption, she adds.
“Some annuities would lock in your income, or even lock in your beneficiaries’ choices at the time of asset transfer. You were limited in anything you could do,” she says. “You couldn’t change anything, you had to stay with the contract for a very long period of time, there was no way to get out of it. Those were the old versions.”
Annuities may be an especially attractive offering at this time due to market volatility, rising inflation and rising interest rates, Guymon adds, because the investments can provide asset protection.
However, workers are generally not using annuities to secure a source of lifetime income and to protect their retirement assets, according to the 2021 Nationwide Financial Advisor Authority Study, which found that advisers and financial professionals favor the investments at higher rates than investors.
Nationwide Annuity Data
The Nationwide survey found wide discrepancies between how advisers and financial professionals understand annuities and the outlooks of investors. While 87% of advisers and financial professionals and 82% of investors have a strategy to generate income in retirement, data show that 92% of professionals have a strategy to protect against outliving their savings, compared with 74% of investors.
David Macchia, founder and CEO of Boston-based Wealth2k and a former director of the Retirement Income Industry Association, adds that in the medical field, “some of these amazing things that are being worked on … hold out the possibility or prospect of a greater longevity,” he says.
Additionally, fewer workers are retiring with pensions, which means retirees will need a strategy to protect against longevity risk, or outliving their savings, including defined contribution plan savings.
The Nationwide research shows that advisers and financial professionals are about two to three times more likely than investors to use a range of annuities to secure guaranteed lifetime income, and that 89% of advisers and financial professionals, compared with only 58% of investors, said they would use annuities as part of holistic financial plans in the next 12 months to protect against longevity risk.
The survey found that for variable annuities with living benefit riders, 48% of advisers would use one, compared with 26% of investors; the rates for in-plan income guarantees, which guarantee the buyer a lifetime income amount, were 42% versus 29%; for single premium immediate annuities, which are bought with a large upfront payment, 38% versus 10%; longevity insurance/deferred income annuities, which provide lifetime income that begins several years in the future, 36% versus 14%; for qualifying longevity annuity contracts, a type of deferred annuity that provides lifetime income, 36% of advisers versus 12% of investors; and contingent deferred annuities, 30% versus 13%.
Contingent deferred annuities establish a contract between the insurance and buyer whereby the company is obligated to make scheduled payments to the owner over the course of their lifetime if an investment account is depleted during the annuitant’s lifetime by allowable withdrawals and/or poor investment performance.
Annuities Altered
Among the notable improvements made to annuities are shorter contract periods, ease of withdrawal of funds and flexible income options that can be customized, Guymon says.
Nationwide takes a two-pronged approach to educating financial professionals and investors on the benefits of annuities. It starts with how and when the investment vehicles can be incorporated into a financial plan and educates consumers on how an annuity can provide “the retirement income guarantees that you’re looking for [to provide] peace of mind during retirement,” Guymon says.
“We have the right clients that are ready and willing to talk about annuities and want to learn more, but the adoption seems to remain level. So we need to create more client-friendly benefits, we need to have more education to the marketplace about how an annuity can benefit your financial plan and we really need to look at the experience of an annuity customer as well,” she says.
Macchia adds that with 2019’s Setting Every Community Up for Retirement Enhancement, or SECURE, Act, plan sponsors have less time than advisers to mull over how to use the vehicles. Limited experience may be one reason for low plan sponsor adoption.
“It’s only recently, with [qualified longevity annuity contracts] and [possible] upcoming legislation, that the inclusion of annuities is going to be much more popular,” he says. “I do not think plan sponsors should be worrying about [including] annuities in-plan. If they’re selecting good-quality insurance companies, there’s very little to worry about … and the benefits for the participants are extraordinarily important.”
He adds, “It’s not your savings that produces your standard of living in retirement—it’s your income. And in that context, having an annuity income as part of your overall strategy is critically important.”
Perception Meets Annuity
Guymon emphasizes that annuities are legal and binding contracts, recognized by courts as insurance contracts, wherein the insurer is obligated to guarantee the benefits outlined.
“We guarantee those with our claims paying ability, so knowing the ratings of your insurance company that you’re signing that contract with is very important, because the ratings are how [insurers are] judge[d] for financial stability,” she says. “Most [annuity buyers] think you get a piece of paper and then the insurance company can do what they want. That’s not the case.”
Macchia agrees that plan sponsors and retirement plan advisers need to get educated on the benefits that annuities can offer to participants.
“A perception took root among some members of the public, and certainly that would include some plan sponsors and some participants, that annuities were something you should shun … but like anything else, change has to be recognized,” he says.
Poor sales practices earned the bulk of blame, he adds.
“The objections that people have … are [from] the past—10, 15, 20 years ago. Poor sales practices, long surrender charges, expensive contracts,” Macchia says. “That experience of the past created a mindset that endures today in a number of financial advisers, and it’s a terrible reality, because it deprives the clients of those financial advisers of the benefits of annuities—which are substantial and tangible and actually quite unique.”
Plan sponsors should embrace content that can help participants understand the benefits annuities can offer, how to invest and what questions to ask about them, Macchia advises.
“Any annuities that make it inside a plan are probably going to be really top-notch,” he says.
By Noah Zuss
August 26, 2022
