(PlanSponsor) - When thinking about their financial security in retirement, retirees value control, safety and predictability the most, according to research published by DCIIA’s Retirement Research Center.
Plan sponsors who are looking to provide a full menu of retirement income options to their participants need to consider the common concerns of retirees, as well as the new product landscape, a panel of experts explained at a PLANSPONSOR Plan Progress webinar last week.
DCIIA’s Retirement Research Center surveyed 2,009 retirees between the ages of 50 and 75 and segmented the respondents into four categories based on their overall feelings about their retirement: optimistic/thrifty (25%), confident (26%), nervous (25%) and struggling (23%).
Same Priorities Across the Board
Despite the retirees’ varying confidence about their financial security, they all ranked receiving a steady income, the safety of their finances and guaranteed lifetime income as their top three priorities—ahead of investment return—when thinking about their finances in retirement.
Pam Hess, executive director at the DCIIA Retirement Research Center, told webinar attendees that respondents’ answers were “remarkably similar” across the four groups, implying more consistency than one might expect.
Capturing high investment returns ranked the lowest in importance among the respondents. Warren Cormier, the director emeritus of the DCIIA Retirement Research Center, said that is likely because people are worried about risky investments, and many retirees know they would not be able to recover from any significant investment loss.
Overall, Cormier said the findings are “good news” for plan sponsors, because they can pick investment products for their retirees without needing to consider into which confidence segment they fall.
What’s Up With Annuities?
According to Bonnie Treichel, the chief solutions officer at Endeavor Retirement, there is a new product landscape of technology and innovation that did not exist a decade ago, and there are several new products entering the market that give plan sponsors the option to assess the needs of the plan and its participants.
In-plan annuities, target-date funds with annuity options and target payout funds are examples of in-plan retirement income products that have been launched since 2020.
However, annuities have developed a bad reputation among participants, and Treichel said adviseors introducing these options should be cautious about the language they use.
“For example, calling this ‘decumulation’ is confusing,” Treichel said in an emailed statement. “This is about the paycheck an individual receives starting the first day of retirement and helping them understand what that paycheck will look like.”
Treichel said people are particularly afraid of retail annuities in which an insurer sells a retiree an annuity with an 8% trail, with no oversight on the person selling the annuity.
But there is a key distinction that should be made with these new solutions, Treichel explained.
“For the most part, [annuities] are being incorporated as a part of the retirement plan subject to ERISA (or similar state law) where a plan sponsor is making a decision in the best interest of participants,” Treichel said. “That means that participants have the protection of someone else thoroughly vetting the annuity option on his/her behalf, unlike annuities sold in the retail market.”
Whether a plan sponsor offers a plan-based annuity, a managed payout or a hybrid of the two, Treichel said each option has trade-offs the plan sponsor has to evaluate before making a prudent decision.
Plan-based annuities are typically more expensive than managed payout because the plan sponsor is paying for the guaranteed income. But based on DCIIA’s research, guarantee and comfort may be what people are seeking the most, Treichel noted.
Kevin Hanney, the founder and president of CapitalArts Global LLC, says participants may be wary of fixed annuities, as they are funded with a one-time lump sum and are subject to withdrawal penalties if taken out early. While fixed annuities tend to offer the highest level of guaranteed income for the rest of the annuitant’s life, Hanney says they tend to be “one-dimensional.”
“When it comes to the practical aspects of delivering a retirement income solution through an employer-sponsored plan, you tend to need more options,” Hanney says.
Many retirement income products come down to a trade-off between certainty and flexibility, Hanney says, adding that it is important for plan sponsors to try to give adaptable solutions.
Show Me My Money
While not ranked as highly as receiving a steady income in retirement, many respondents to DCIIA’s survey placed significant value on having control of and access to their money, as well as reversibility—in other words, not being completely locked into a product.
“People always want an escape hatch,” Cormier said during the webinar.
The SECURE 2.0 Act of 2022 has helped pave the way for new retirement income solutions and has created more flexibility, such as allowing annuities to increase at a constant percentage of no more than 5% each year and raising the $200,000 cap on how much money a participant can use from a retirement account to purchase a Qualified Longevity Annuity Contract.
As annuities have mutated into several different forms, such as deferred annuities and variable or index annuities, Cormier predicts that there will be an integration of different products in the future and that plan sponsors may start offering a menu of retirement income options for participants.
In order for more participants to take up these different retirement income options, Treichel said advisers and plan sponsors need to become educated; then they will need to continue to educate participants.
“There is a lot of perception around retail annuities, and this is a different market, so it will take education to keep everyone informed of the new offerings available to support participants,” Treichel said.
By Remy Samuels
March 20, 2023
