With defined contribution plans becoming the new normal, employees say the guaranteed income aspect of annuities is an attractive option; yet few employees opt in to such plans when theyre offered by employers. Education and advice from a valued benefit adviser can help match interest with engagement, some experts say.
When lifetime income options are added to DC plans, participant satisfaction increases, participant confidence increases, and participant outcomes improve due to better long-term investing behaviors, a 2012 Prudential Retirement survey found.
In fact, two out of three employees said investing in an in-plan guaranteed retirement income option made them more confident in general about their retirement security. They also said they were likely to recommend the option they had invested in. Eighty-nine percent of employees surveyed by BlackRock in 2012 said they would like their plan sponsor to provide them with income generating options in their retirement plan.
Yet research from Towers Watson finds when such an option is offered to retiring participants lifetime income distribution is chosen by less than 5%.
While lifetime income options are intended to improve retirement readiness, the new solutions are immature, can be complicated and early adopters face some challenges, the study says. Many of those challenges can be overcome with the help of an adviser.
Two of the main reasons employees fail to opt for lifetime income distribution when it is offered, according to Robyn Credico, the national leader of defined contribution at Towers Watson, is the fact they dont know its being offered or a failure to understand its value.
The annuities tend to be expensive and if you dont understand their value, youre not going to adopt them, she says.
When advisers educate individuals about the value of the plans, they could change the employees tendency for passive behavior, she says, adding thats true particularly for individuals in their late forties or early fifties, for whom retirement readiness is becoming a concern.
For many, she says, educating employees about longevity risk should be done using terms people can relate to. Individuals understand the value of auto insurance, for example, so comparing the value of insuring income in retirement to the value of insuring a car, for instance, can be useful.
Telling them how to execute on their decision is also a big deal, she adds. So even if were talking about enrollment in plans, the easier you make it for the person after youve educated them, the more likely you are to be successful.
Theres a big opportunity for advisers to help the plan sponsor and the participant, says Martin Schmidt, an adviser at the Institutional Retirement Income Council.
From a participant perspective, he says, If the adviser has direct contact with the participants, the adviser can help them make a more informed decision.
He adds, It cant be a one size fits all solution. The answer is different for me than for you. Advisers need to bring the best information to the table.
For the plan sponsors, advisers can help them understand whether annuities and similar products are a good idea for the plan, he adds.
Annuities are not a viable solution for all employers, Credico and Schmidt agree.
I think for certain employers it may make sense to offer these solutions. Those are employers where the employees stay for a long time. If your employees typically stay for less than three years, it makes no sense, says Credico.
For employers with long-term employees and that are somewhat paternalistic and want to help employees prepare for retirement, this is a good plan. Those are the ones for which there is value, she adds. Especially if they dont have a defined benefit plan.
Schmidt says annuities can often be a good fit for companies moving from a DB plan to a DC plan, as well, because employees already have that mindset.
