Help Plan-Sponsor Clients Meet the Demand for Annuities

Concern among retirement savers about the future of Social Security is certainly not new.

This continued perception that the system might run out of money is leading to interest in other sources of retirement income.

A majority of Americans who are participating in an employer-sponsored retirement plan now say they would take advantage of “income solutions” (read: annuities) if they were offered as investment options, according to the 2023 Schroders US Retirement Survey.

This year’s Schroders survey, conducted by 8 Acre Perspective, polled 2,000 investors nationwide between the ages of 27 and 79.

Only 10% of those who aren’t retired said they will wait until the full retirement age of 70 to begin receiving maximum Social Security benefits.

The most popular reason given for this decision (by 44% of non-retired respondents) was concern that Social Security could run out of money or stop making payments.

As a result, the Schroders survey found that eight out of 10 investors currently participating in 401(k) and other defined contribution plans view in-plan “retirement income solutions” (again, annuity plans) playing a vital role in their financial futures.

Furthermore, more than half of those participating in defined contribution plans who don’t have access to an in-plan income solution, or don’t know if they do, said they wish they did.

Embracing Changes

The demand for annuities in 401(k) plans comes at a time when regulatory updates will make it easier for plan sponsors to offer annuities to participants—and for participants to take full advantage of in-plan annuities.

A new law, the SECURE 2.0 Act of 2022:

• Updated Internal Revenue Service (IRS) regulations so that the value of an annuity contract in a retirement savings account is no longer excluded from required minimum distributions, and annuity income is applied to required minimum distributions.
• Raised the minimum purchase for a qualified longevity annuity contract, or deferred income annuity, in a retirement plan from $125,000 to $200,000, allowing more participants to buy annuities.

Furthermore, the original Setting Every Community Up for Retirement Enhancement Act of 2019, or Secure Act, simplified and clarified the due diligence that employers must conduct on insurance carriers before offering the carriers’ guaranteed-income annuity products in their plans.

Overcoming the Obstacles

Despite the demand from 401(k) plan participants for annuities, and the regulations that make it easier for sponsors to incorporate them into their plans, only a little more than 10% of 401(k)s offer them.

According to the 2023 Hot Topics in Retirement and Financial Wellbeing report published by Alight Solutions, just 12% of defined contribution plan sponsors have annuities in their plans, and a mere 3% said they were “very interested” in adding annuities to their plans.

The lack of widespread in-plan annuity programs could be due to sponsors’ fear of lawsuits.

Institutional Investor quoted a corporate investment chief as saying, “There’s great fear of being sued later … One plan may not pay out as much as another one.