There’s a window of opportunity for financial advisors to build business: They can use annuities available in 401k plans to help workers with their post-retirement income.
The Pension Protection Act of 2006 gave plan sponsors the green light to hire financial advisors to help workers manage their retirement savings. Meanwhile, the Obama Administration is looking into immediate annuities as a way to help workers reduce longevity risk. And Senate Bill 2832, under consideration by the Committee on Health, Education, Labor and Pensions, could add momentum to this trend. That bill would require plan sponsors to show on their annual benefit statements how the value of retirement accounts translates into lifetime guaranteed monthly income payments.
Richard Arzaga, a San Ramon, Calif.-based financial planner, likes the idea of giving workers the choice of getting lifetime guaranteed income from defined contribution plans. In the past, he says, many employees failed to manage their retirement savings to get the income they needed in retirement.
“This decision should be made on an employee-to-employee basis,” Arzaga stresses. “Every employee has a variety of current circumstances, investment goals, financial planning needs, and estate planning needs.”
One in five companies, or some 96,000 firms, already offer annuity income products in their 401 (k) plans, according to statistics of the Profit Sharing/401 (k) Council, Chicago, and the U.S. Department of Labor.
In addition, 22 percent of plan sponsors are considering adding retirement income guarantee products to their plan, based on a Profit Sharing/401 (k) Council survey in March, 2010.
Mitsubishi International Corp., New York, added a Prudential annuity to that company’s defined contribution plan a few years ago, according to Jil Galloway, the company’s vice president of human resources.
“We were looking for an in-plan withdrawal benefit that features flexibility and protection,” she says. “Mitsubishi International is now better able to help our dedicated employees obtain a more secure retirement.”
Needless to say, financial advisors could see thousands of plan sponsors looking for advice on how employees can use income annuities in retirement plans. That could lead to greater IRA rollover business, based on recent results of a couple of surveys. A survey conducted by Spectrem Group, Chicago, last September (2010) found that more than one-half of plan participants put their savings in IRA rollovers with investment firms that they have done business with in the past.
Smaller corporations with 401 (k) plan assets of less than $50 million typically use financial advisors to help their employees, adds another recent survey by Amana Capital Partners, Maplewood, N.J.
Graydon Coghlan, a San Diego, Calif.-based financial planner who manages $500 million in IRA rollovers, stresses that it’s important to have a presence in the plan sponsor market.
“I have a lot of clients who express interest in immediate annuities,” Coghlan says. “I would consider an immediate annuity if it fit into a client’s financial plan. But I would compare the immediate annuity offered in the 401 (k) plans to other insurance companies to get the best deal.”
Insurance companies are serving up some unique annuity designs for the qualified plan marketplace. MetLife, New York, for example, offers five types of immediate annuities for 401 (k) plans. One product lets individuals buy future pieces of guaranteed income, thereby creating their own “personal pension.”
Another, MetLife's “Personal Pension Builder,” is a fixed deferred income annuity offered with a 401 (k) plan. MetLife also offers immediate income annuities through a BlackRock-managed “SponsorMatch” program, designed to provide guaranteed income to the participant in retirement.
The insurer’s “Guaranteed Income Program” is a fixed immediate annuity designed for employees looking to supplement their retirement income with a fixed payment that never changes, regardless of market conditions. Generally purchased at retirement, it is offered in conjunction with a corporate-sponsored defined benefit or defined contribution plan.
MetLife also offers a longevity insurance product—a fixed deferred income annuity, which is typically purchased at the point of retirement at age 65. It is designed to generate guaranteed income starting at a later age. For example, it might start at an individual’s 85th birthday, or at any point during an individual's retirement when other assets might be running low.
Genworth Financial, Richmond, Va., offers a 401 (k) “ClearCourse” annuity product. It allows each contribution to purchase a specific amount of retirement income for life. Contributions are invested in a balanced fund, which invests in stocks and bonds.
With the “Hartford Lifetime Income,” each employee’s 401(k) contribution to the annuity purchases income shares. Each income share provides the employee with a guaranteed income stream of $10 per month for life startingat age 65. The cost per share will change, based on current interest rates and the age of the employee. The guaranteed monthly income payment, beginning at age 65, is determined by multiplying the total number of accumulated income shares by $10.
If an employee accumulates 50 income shares of lifetime income, for example, he or she will get $500 of monthly income for life, starting at age 65.
The Hartford product is designed to work in conjunction with other types of investments. For example, an employee can invest part of his or her 401 (k) in mutual funds for growth and the rest in the “Hartford Income Builder.” So the annuity will provided a guaranteed source of income to cover basic expenses, such as food, clothing, housing and medical expenses.
Prudential Financial’s “Prudential IncomeFlex” takes a totally different approach. It has a guaranteed lifetime minimum withdrawal benefit, based on an employee’s investment in a 401 (k).
An employee over age 50 can select from five different investment portfolio funds—ranging from conservative to more aggressive. Starting at age 65, employees can obtain a guaranteed yearly paycheck equal to a minimum of 5 percent of an “income base,” which is the amount invested in Prudential’s portfolios. Defined contribution plan assets, as well as future contributions, can be transferred into their chosen funds to increase the “income base.”