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Benefits Business Group annuities show promise P-C agency benefits departments may be well suited to offer the product By Len Strazewski Helping your clients with health insurance solutions is tough enough, but diving into the complex world of retirement benefits and defined contribution programs such as 401(k) and 403(b) has been a formidable challenge that many P-C agents want to avoid. Until recently, that is. Perceiving a need for stable investments and aware of the latest wave of Baby Boomers facing retirement, employee benefits consultants and some leading life insurers are promoting new, more flexible annuity programs as either components of, or supplements to, defined contribution retirement plans. That’s good news for agents and brokers who have specialized in property/casualty insurance and now want to build up their book of employee benefits. P-C producers often find they have a lot to learn when they take on the health benefits field and plan designs that are layered with deductibles and coinsurance levels, managed care restrictions, wellness options and specialty benefits carve-outs. For the most part, though, health plans are still administered by health insurers and are defined by a familiar instrument—an insurance policy. Retirement benefits, however, can be totally alien to P-C agents and brokers. Most defined contribution plans are administered by banks, securities firms or mutual fund companies and are sold only by licensed securities dealers with special training in plans regulated by ERISA (Employee Retirement Income Security Act). Annuities, in contrast, are a much more familiar product to agents and brokers and somewhat less complicated to market. What’s more, there is a market need waiting to boom, according to LIMRA International, the life insurance industry research organization. According to a recent study from LIMRA, the Society of Actuaries, and Matthew Greenwald & Associates, many workers are not saving adequately or at all for retirement. This trend can be both disruptive to employer human resource managers’ strategy as they attempt to prepare for the retirement of skilled workers, and disastrous for the employees who may discover that they cannot afford to retire when they should. “According to our research, more than one-third of workers are not saving for retirement. This translates into over 44 million workers who will be at risk of not being able to pay for the basics in retirement, such as monthly bills for housing and health care,” says Eric Sondergeld, LIMRA corporate vice president and director of retirement research. “Unless we all work to improve consumers’ retirement planning, our government and social programs will collapse under the strain of taking care of those who are unprepared and cannot take care of themselves,” he says. Opportunities abound The LIMRA study offered 10 recom-mendations for employers, all of which point to opportunities for agents and brokers who are willing to expand their products and services to include retirement annuities, long term care insurance and financial planning services. Specifically, the study recommends that employers: 1. Develop a retirement strategy and provide company-paid retirement benefits (defined benefit, defined contribution or both) if appropriate. Consider providing continued medical coverage at least until age 65 for early retirees. 2. Make a retirement savings plan available, even if you do not think your company can afford to match employee contributions. Consider automatic enrollment and automatic step-up in deferrals each year. 3. Develop opportunities for phased retirement, job sharing and other mechanisms to enable older employees to stay in the workforce. 4. Give employees information about how they can use retirement assets to provide sustainable income and how much income they can generate from specific asset levels. 5. Offer employees impartial information about the long tem care risk and the most effective ways of funding that risk even if their company does not offer long term care insurance to its employees. Help employees focus on the questions they might ask as they think about whether to buy long tem care insurance. 6. Provide employees with sources of impartial information on retirement income planning. Include sources of retirement income management services for employees nearing retirement. 7. Offer solutions in defined contribution plans that can help employees choose how to allocate their investments, including default investment options, target maturity options and funds that are automatically rebalanced. 8. Bring qualified financial professionals to the worksite and offer your employees financial planning and asset management advice. 9. Consider inflation-adjusted payout options (including lifetime annuities) in retirement plans (defined benefit or defined contribution). 10. If your company’s defined contribution plans do not offer annuity options, consider adding them or providing some way for employees to buy an annuity (with joint-and-survivor options) through a rollover IRA. Sales are booming Personal annuities are already common and sales are booming, according to LIMRA. The organization reported sales of $236.2 billion in 2006, an increase of 9% over the previous year. However, offering group annuities to individuals as an option in their defined contribution plan is virtually a new growth area—and it’s been getting lots of support from other industry experts and some of the largest annuity underwriters. In August, employee benefit consultants Watson Wyatt Worldwide proposed that annuity options within defined contribution plans might be the new frontier in 401(k) plan management—helping to meet the need for more stable management of investment savings for Baby Boomers approaching retirement age. “It’s to the employer’s advantage to help ensure that employees have sufficient retirement income,” notes Brian Hersey, an investment director and senior consultant with the firm. “Otherwise, they may see a generation of workers who cannot afford to retire.” The consultants predicted escalating interest in a broad range of annuity products, including institutionally priced immediate and deferred annuities for retirees as well as flexible and portable in-service annuities for continuing workers. Several of the large annuity companies, including Prudential Financial, MetLife, Genworth Financial, and Hartford Life, have recently introduced in-plan annuity options with two key features: a guaranteed withdrawal value to protect the downside, and open market valuation to allow for an upside if investment markets flourish. Prudential’s IncomeFlex policy, for example, features a guaranteed withdrawal benefit built on an asset allocation program that adjusts with age, shifting toward more conservative fixed-income options as the plan participant approaches traditional retirement age. The company says the plan provides retirement income stability in the face of market fluctuations but also allows greater capital accumulation if the investment market outperforms estimates. A note of caution A few cautionary notes, however. The annuity investment idea is still a bit new to human resource executives and employee benefit managers, who for the past 20 years have been focusing on mutual funds and the prospect of big annual returns. The new concept may take some selling—even though equity funds have been unstable since August. Fewer than 100 employers now offer an annuity investment option, according to industry sources. “There’s no stampede to add annuities yet,” notes Louis Mazaway, a partner at the Groom Law Group in Washington, an employee benefits law specialist. “It’s going to take some education of both employers and employees.” Annuities also have a history of high expense ratios—a controversial issue in the past year. Several legislators have signed on to support “The 401(k) Fair Disclosure for Retirement Security Act of 2007” introduced by Rep. George Miller (D-Calif.), which requires disclosure of sales commissions, start-up fees, investment management fees and trustee fees, and most other costs associated with defined contribution plan investment options. As a result, old-style annuities may come under some intense scrutiny—along with the mutual fund investment options. * The author |
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