Feb. 9 (Bloomberg) -- Insurers and mutual-fund companies are starting to sell retirement accounts with built-in annuities in response to concerns Americans will outlive their savings.
President Barack Obama on Feb. 1 called for a change in government rules to allow adding annuities to 401(k) retirement plans. While the annuities offer a steady stream of income in exchange for upfront payments, the price for peace of mind may be higher fees and less access to cash.
“You’re paying for a benefit that you may or may not use,” said Glenn Daily, a fee-only insurance consultant, referring to annuities. “These things are so complicated I doubt many people will
understand what they’re buying.”
understand what they’re buying.”
MetLife Inc. and Prudential Financial Inc., the two largest U.S. life insurers, are aiming to tap into what may become a $1 trillion market by blending annuities with target-date 401(k) funds, which shift to more conservative assets such as bonds as an investor nears retirement. The funds were used as the default investment by 87 percent of retirement plans in 2008 with automatic enrollment, according to Vanguard Group Inc.
Insurers are working with mutual-fund companies to build the guarantees into 401(k) funds because state laws require an insurance charter to sell annuities.
The income guarantee that insurers and mutual-fund companies are developing lets workers pay for an annuity in installments using their regular contributions to retirement accounts, said Garth Bernard, chief executive officer of the Boston-based Sharper Financial Group, which specializes in retirement income solutions for financial companies.
Fund Scrutiny
Legislators have scrutinized target-date funds because some lost as much as 41 percent in 2008. The funds attracted $45 billion last year, up from $28.7 billion in 2006, according to Chicago-based Morningstar Inc.
“It’s a huge market,” said Tom Johnson, senior vice president in New York Life Insurance Co.’s retirement income security business, of the potential for annuity/retirement accounts. Americans held $6.8 trillion in 401(k) plans and IRAs as of September 2009, according to the Investment Company Institute, a Washington-based mutual fund trade group. If 15 percent of those assets went to guarantees, it could mean more than $1 trillion for insurers, Johnson said.
“We believe guaranteed income is important because it locks in a level of retirement income,” said Jamie Kalamarides, senior vice president of retirement solutions for Prudential, based in Newark, New Jersey. “Most Americans aren’t saving enough.”
Prudential, MetLife
Prudential and MetLife have already introduced income guarantees designed for target-date funds. Investment-management firm BlackRock Inc. is offering to employers a target-date fund with a MetLife annuity as the fixed-income component, said Kristi Mitchem, head of New York-based BlackRock’s U.S. defined contribution.
Asset manager AllianceBernstein Holding LP is working on a similar product with multiple insurers including Axa SA, while Putnam Investments LLC expects to announce a lifetime income benefit for its 401(k) funds this year, the companies said. John Hancock Financial Services, a unit of Manulife Financial Corp., has a guaranteed lifetime income benefit available in some of its 401(k) plans, said spokeswoman Melissa Berczuk in an e-mail.
Fidelity Investments, the largest target-date fund provider, offers employers a 401(k) fund with an annuity through insurer Genworth Financial Inc., said Michael Doshier, vice president of the Boston-based company’s workplace investing group. Vanguard is also exploring income stream options within its retirement plans, said spokeswoman Linda Wolohan.
Two Forms
The types of guarantees being developed vary and have trade-offs, said Bernard of Sharper Financial. One type has relatively high fees and another prevents retirees from liquidating their savings once they start receiving monthly income, he said.
Annuities and guaranteed income benefits in retirement plans can be an important safeguard against outliving savings as more Americans fund their own retirement, said Moshe Milevsky, a finance professor at York University in Toronto. Combining them with target-date funds is a concern, he said.
“Let’s not get carried away,” said Milevsky, who specializes in insurance. “To say that we are going to lever these guarantees on top of target-date funds that have not been fully tested yet, I’d be wary.” The Department of Labor endorsed target-date funds as a default investment option for employers in 2007.
The Treasury and Labor departments started reviewing public comments this month on how to make it easier to convert savings into lifetime income streams.
Government Guidance
“Many plan sponsors would like explicit guidance from regulators,” said Tom Idzorek, chief investment officer at Ibbotson Associates, a unit of Morningstar. A government endorsement would create “a rush of sponsors trying to add these to plans,” he said.
Last year, 4 percent of employers offered a plan that allowed participants to allocate a portion of contributions to an income guarantee, according to Callan Associates Inc., which surveyed 90 plan sponsors with more than $100 million in assets. The previous year, the total was 3 percent. Employers are concerned about cost, portability and how to pick an insurance provider, said Lori Lucas, defined contribution practice leader for the San Francisco-based investment-consulting firm.
Hard to Transfer
“Those fees may reduce account values by 7 percent to 9 percent over 10 years,” said Drew Denning, vice president of retirement and investor services at Principal Financial Group Inc. The Des Moines-based firm, the fourth-largest provider of target-date funds, recommends investors wait until retirement, when they know their financial circumstances, before deciding to shift a portion of their savings to an annuity, Denning said.
Employers also are concerned that guarantees will prevent employees from exiting their retirement plans if they transfer jobs, said John Carl, president of the New York-based Retirement Learning Center, which consults plan sponsors.
“The portability of these contracts at this juncture is minimal between insurers,” Carl said. “You’re essentially locked into the program you choose -- or are defaulted into.”
That’s because an insurer calculates its annuity payments based in part on the life expectancy of a pool of individuals holding such contracts, which makes it harder to switch from one insurer to another, Carl said.
Company Solvency
Solvency of the offering company is another impediment, said Robert Toth, an attorney who specializes in retirement plan products and services.
“How do you make a decision that the insurance company will still be here 30 years from now?” said Toth, who is based in Fort Wayne, Indiana. “Employers fear making that choice and being responsible.”
Longevity insurance, another type of income guarantee, may be a better, cheaper option for protecting against outliving savings, said Daily, the New York-based insurance consultant. Longevity insurance guarantees future monthly income typically around age 80 and may be less expensive because “you’re only buying the tail end” of the benefit, Daily said.
“Why should you take the plunge now instead of waiting?” said Daily. “Some of these guarantees are so hard to value that you have to be an economist to figure it out.”
To contact the reporter on this story: Margaret Collins in New York at +1-212-617-8925 or mcollins45@bloomberg.net.
To contact the editor responsible for this story: Rick Levinson at +1-212-617-3377 or rlevinson2@bloomberg.net.
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