BUILDING A LIFETIME INCOME IN A DC RETIREMENT PLAN
Lincoln Financial sees a bright future for in-plan annuities
By Thomas A. McCoy, CLU
Last July, Lincoln Financial Group (LFG) introduced a new guaranteed income product for defined contribution (DC) retirement plans. The timing appears to have been good. At about the same time, LFG released the results of research it conducted that showed that more than 70% of workers across all age groups would use a guaranteed income product option if it were offered to them.
Almost two-thirds of the workers said they would consider a guaranteed income option in their retirement plan to be a “wow factor” when evaluating a job offer. More than half (54%) of workers said they would prefer to be automatically enrolled in an in-plan guaranteed investment option.
Notwithstanding this interest from the workers LFG surveyed, in-plan annuities have had a bumpy ride industry-wide over the last decade. According to figures from LIMRA-affiliated Secure Retirement Institute, the number of DC retirement plans offering in-plan guaranteed income investment options declined between 2016 and 2019.
Lincoln Financial Group, one of the early entrants in the market for in-plan annuities in 2014, sees an increased opportunity for the product now. Ralph Ferraro, senior vice president of retirement plan products and solutions for LFG, explains how the in-plan annuity market has evolved and what is driving its progress.
“After the financial crisis of 2008-2009, a handful of companies introduced in-plan annuity products over the next four or five years,” he explains. “It was a response to two key concerns that plan participants had. First, they were asking, ‘How do I protect a nest egg that I spent 25, 30 or 40 years building during my working career from market volatility? And second, how do I ensure that I don’t outlive my assets?’
“We could see from our surveys and from talking to participants that they could recognize the value of an in-plan annuity,” Ferraro adds, “but plan sponsors were concerned about their fiduciary liability in selecting an insurer—the provider of the guarantee that might not kick in for 20 or 30 years.
“In 2018 and 2019, Lincoln and other companies advocated for legislation that would address some of the key concerns of plan sponsors and participants, including fiduciary liability,” he says.
In December 2019, the SECURE Act was signed into law. It grants safe harbor protection to plan sponsors if an annuity provider for their plan were to face financial difficulties in the future, assuming the provider meets the required financial standards when the annuity is introduced.
The act also eliminates uncertainty for in-plan annuity participants by making the product more portable. It allows them to roll over the accrued annuity assets to an IRA if they leave the employer that is providing the in-plan annuity or their employer stops offering the product.
LFG’s new product, called PathBuilder, is centered on a guaranteed lifetime withdrawal benefit (GLWB), which begins paying out at retirement. Each contribution a plan participant makes to the PathBuilder investment option goes toward establishing an “income base” for those funds to become available at retirement. The value of the income base maintained by the participant can never go down but can rise depending on investment results.
“With some solutions for providing retirement income, you can still run the risk of outliving your assets, or you could lose access to underlying account value,” says Ferraro. “We believe the GLWB is the ideal solution for protecting accumulated savings and generating protected income throughout retirement so you don’t outlive your assets. It guarantees a lifetime income while offering the upside potential for investment gains.”
Participants can check the value of their income base at any time to see what level of guaranteed income it will produce at the age they want to begin withdrawals.
“It allows participants to retain control over their assets,” Ferraro continues. “They can choose when they want to start receiving lifetime payments. If they decide to move out of the solution—maybe they find something that pays a higher rate of interest—they can move their underlying account value with no surrender charge.
“They also can leave assets to their heirs—they don’t lose them as they might with some other kinds of fixed annuity structures.”
LFG is a major provider of both institutional retirement plans and individual annuities. Its in-plan product is designed to be an affordable way for workers to acquire the benefit of lifetime income of an annuity because “its costs are institutionally designed in price, scaled to a defined contribution plan,” says Ferraro.
Sponsors of defined contribution plans can include Lincoln PathBuilder in their plan like any other investment option. Participants can choose to direct any portion of their contributions to it. They can also elect to use it as part of a custom target date portfolio. So as their mix of equity and fixed income investments shifts as they approach retirement, the dollars from that mix go toward the income base in Lincoln PathBuilder.
Ferraro notes, “Since passage of the Pension Protection Act (PPA) in 2006, the industry has learned about the value and efficiency of auto-enrollment, auto-escalation, and using a qualified default investment alternative (QDIA). Those tools have been successful in guiding individuals throughout their entire accumulation period.
“Now we are taking those tools and adding the income guarantee as the final component. We see this next generation product as ‘auto income.’
“We can still offer a high-touch, personalized experience for participants,” he continues. “Participants can go onto our website and set appointments to meet one on one with retirement consultants to help them understand their individual needs and how best to save for the retirement they envision. Today those appointments are handled virtually.”
Those who use the digital tools and engage with Lincoln’s retirement consultants wind up contributing almost 50% more to their plans, Ferraro says.
In analyzing the potential for guaranteed income products in DC plans, Ferraro believes it is helpful to take a long-term perspective. He draws a parallel between in-plan annuity products and what has happened with target date funds.
“Target date funds first became available around 1992 or 1993. There was slow acceptance at first. Then, 14 years later when the Pension Protection Act (PPA) was passed, target date funds became one of three kinds of qualified default investment alternatives (QDIAs). Today 60 to 80 cents of every new dollar going into a defined contribution plan goes into a target date fund.
“It didn’t happen overnight,” Ferraro observes. “It has just been steady growth in utilization in concert with the automated plan design features.
“We see the passage of the SECURE Act with the annuity safe harbor as the same kind of catalyst for the guaranteed income product that the PPA provided for target date funds. It’s still going to take time, but we think there will be increased use of the guaranteed income product each year,” says Ferraro.
Whatever time it takes to measure the DC plan product’s success, the LFG research indicates strong potential demand for a guaranteed income product. Awareness of longer life spans and the memory of unexpected jolts to financial markets can only enhance its appeal.
“A defined contribution plan is the primary savings vehicle for four out of five workers,” says Ferraro. “We are focused on helping them transition their account balances into a guaranteed income for life. The ultimate outcome is income.”
Thomas A. McCoy, CLU, is an Indiana-based freelance insurance writer.