Navigating the path to guaranteed lifetime income: An equity-focused approach

As individuals transition into retirement, the quest for a secure and sustainable income stream becomes paramount. Guaranteed lifetime income (GLI) options, such as annuities, offer a promising solution to address longevity risk and provide a steady flow of income throughout retirement. Additionally, we know that an additional source of GLI on top of Social Security is something that most Americans feel is essential to funding the lifestyle they want in retirement.¹

However, selecting a guaranteed lifetime income option that works to address the needs of a diverse range of participants requires a comprehensive assessment from an equity lens. As disparities in the defined contribution system persist, an equity-focused approach is needed to ensure new investment options added to the plan complement other interventions that help support a financially secure retirement for all employees.

A recent white paper (PDF) from Allianz Life highlights six characteristics for evaluating guaranteed lifetime income options, three of which are especially important to achieving an equitable implementation of GLI: flexibility, accessibility, and portability.

Flexibility: Tailored to unique needs

Retirement is a dynamic phase of life, and an individual’s needs and preferences may evolve over time. Therefore, flexibility is an important factor to consider when evaluating GLI options. Opting for GLI structures, such as those with a Guaranteed Lifetime Withdrawal Benefit (GLWB), that do not require annuitization and allow for adjustments to income streams provide a level of flexibility for unforeseen circumstances or changing financial goals. 

Some GLI products also provide a level of flexibility during accumulation years as well. Participants are not locked into a contribution pattern, and can choose based on their own circumstance, or through the help of a managed account, how and when to contribute to the annuity. The flexibility afforded by these features is valuable to participants of all genders, races, and ethnicities. However, it can play an outsized role in the lives of those who are more likely to shift responsibilities due to changing circumstances.

For example, women are more likely to take on essential caregiving responsibilities for children and adult family members.² This may mean a reduction in working hours, or taking a lower paying job to balance their familial responsibilities. As such, having the flexibility to adjust contributions based on current circumstances and responsibilities is important.

Accessibility: Maintaining access to cash value

When GLI contracts provide guaranteed lifetime income, many impose restrictions on one’s ability to access underlying capital. This is due to a process called annuitization, which requires participants to give up access to assets up front in order to convert those assets into a guaranteed stream of income.

Limited accessibility to underlying cash value may dissuade many, for whom unexpected expenses are a real fear, from adopting GLI solutions regardless of the value they may provide. Disparities in how much different demographic groups have saved for emergencies has a significant impact on level of comfort with giving up access and/or control of funds.

It’s important, therefore, to consider GLI products that offer some degree of accessibility. Annuities with a GLWB allow participants to retain access to the underlying cash value of their annuity should circumstances change that require them to access these funds. Market value adjustment and taxes may apply to either a full or partial withdrawal. However, most in-plan annuities with a GLWB do not have a withdrawal fee. This can provide participants with a level of comfort knowing that they can still access their money in the event they need it.

Portability: Seamless transition across plans

In today’s mobile workforce, individuals may change employers multiple times throughout their careers, or take career breaks to focus on family and caregiving responsibilities, personal health situations, or furthering education. True portability means GLI options remain accessible and unaffected by these potential transitions. It is important that the pricing, benefits, and guarantees afforded by the GLI contract stay the same when transferring to another employer-sponsored retirement plan, or IRA.

An individual contract design is pivotal in ensuring this continuity as benefits are calculated and guaranteed at the participant level. In contrast, many group annuity products may require individuals to convert to an individual contract at the time of retirement – often at a higher cost. Group products may also require complex contractual agreements to maintain guarantees when transitioning to another plan. As different demographic groups experience job transitions and caregiving breaks at higher rates than others do, protecting accumulated guarantees, pricing, and benefits is key to ensuring an equitable application of GLI in a plan.

Ensuring equitable access to financial security

Guaranteed lifetime income options have the potential to play a transformative role in securing financial well-being in retirement. Advisors, consultants, and plan sponsors can make informed decisions that support the unique financial needs of diverse populations by adopting an equity-centric approach to evaluating these solutions. These efforts can help bridge the equity gap in retirement planning and ensure that all individuals have the opportunity to achieve financial security in their retirement years.