Addressing 5 fiduciary concerns for guaranteed lifetime income

I am worried about taking on additional fiduciary risk by adding a guaranteed lifetime income product.

The provisions in SECURE 1.0 that paved the way for these products arose from concerns over the ability of defined contribution plan participants to accumulate sufficient plan savings to fund retirement living expenses – including making sure they are equipped to withstand longevity and investment risks.

We know that helping protect income and safeguard against risks can help improve outcomes. We also know that as the fiduciary, you have the responsibility to run the plan solely in the best interest of participants and beneficiaries.

It follows that plan fiduciaries should consider all solutions that have the potential to improve participant outcomes – both in terms of saving enough money for retirement, and in not running out of money while in retirement.

Selecting an income product may be less risky than you think due to the safe harbor provisions. The new provisions facilitate the insurer review process for plan sponsors by permitting the fiduciary to rely on insurer representations in concluding that the insurer is financially capable of satisfying its obligations under the annuity.

One of my responsibilities as a fiduciary is to only pay reasonable expenses; I am concerned that an annuity will be too expensive.

First, it’s important to evaluate fees paid for benefits in relation to the value they provide. According to Greenwald Research, a growing number of participants say higher fees are worth it for a guaranteed lifetime income option (49% in 2022 vs. 39% in 2021).¹ Participants who already have a source of guaranteed lifetime income through a traditional pension are even more likely to say higher fees are worth it (59%).¹

Second, today’s in-plan annuities aren’t all the same as before. Earlier products were more expensive and more likely to be variable annuities subject to market loss. Many now are cost-effective and include fixed index annuities with stronger insurance guarantees and living benefit features.

I need to be sure participants have sufficient information in deciding how to allocate their account among the options offered under the plan. What resources are available to help participants understand lifetime income solutions as an investment option?

These products can be fully integrated with the participant experience with resources and information embedded in a recordkeeper’s user interface (UI), including required notices and disclosures.

Additional promotional and educational materials may also be incorporated into the experience to deepen understanding and aid in decision-making, which can help combat perceptions that the products are too complex. In fact, over half of participants surveyed said complexity is not an issue if there are clearly written explanations, or someone available to help explain it to them.¹

There’s also a strong interest and desire to learn about these solutions at the plan sponsor level. Eight in ten plan sponsors want to learn more about how in-plan annuities are different.² When plan sponsors and plan advisors and consultants are better informed about these products, that will trickle down to the participant level as well. As an industry, we need to focus on education.

I am worried about defaulting participants who may not want or need a guaranteed lifetime income solution if I offer it as part of the Qualified Default Investment Alternative (QDIA).

As part of the QDIA, such as through a managed account, guaranteed lifetime income solutions can be a powerful tool to help combat behavioral biases and provide protection for participants.

However, there may be cases when a participant does not need the guaranteed lifetime income solution. By delivering the solution through a managed account that is a QDIA, the managed account provider then determines allocations to the annuity based on the participant’s data points.

With the services of a professional investment manager, plan fiduciaries and participants can feel more confident that an allocation to the annuity is appropriate to the participant’s unique situation.

If there is only one guaranteed lifetime income product available on my client’s recordkeeping platform, how can I be sure this option is in the participant’s best interest?

Even if there’s only one guaranteed lifetime income option on the recordkeeper’s shelf, you can still conduct a prudent due diligence process and evaluate the product in the context of plan objectives, including that a participant not run out of money while in retirement.

However, optionality is important to participants and plan sponsors alike. Most participants who think employers should offer retirement investment options in-plan believe there should be multiple options.¹ For this reason, middleware technology can play an important role in helping provide product choice by streamlining connectivity to product providers.