The number of people electing in-plan retirement income guarantees has increased for three years in a row. By the double digits. So has the number of plan participants who have access to in-plan guarantees. So has the number of plans offering in-plan guarantees.
They’re not mainstream yet, but they are heading in that direction. This has implications and opportunities for advisors as well as providers, employers and participants.
In-plan income guarantees are options that plan participants can elect from their employer-sponsored defined contribution (DC) plans, such as 401(k)s, according to LIMRA Secure Retirement Institute (LIMRA SRI).
Plan participants typically contribute a portion of their plan savings to the option while they are still working in order to secure a guaranteed income stream in retirement. Currently, there are two main types of options available for this purpose. They are guaranteed lifetime withdrawal benefits (GLWBs), which are the dominant type, and deferred income annuities (DIAs), which are the new kids on the block.
An Emerging Product Line
Not that long ago, LIMRA SRI didn’t even track these options. That’s because, although the products were rich with longevity DNA, few people knew they existed and few bought them.
By 2012, however, the features began gaining traction, so LIMRA SRI began following the products even though industrywide numbers were still pretty low, Mark Paracer said. Paracer is project director for LIMRA SRI’s U.S. Retirement Plans study.
Now, three years later, the picture looks quite a bit different. For example, LIMRA SRI has found all those double-digit increases:
» In 2014, 71,300 plan participants elected an in-plan income guarantee. This is up 24 percent from 49,900 in 2013, which reflected a 5 percent increase from 47,600 in 2012.
» Also in 2014, the participants who had access to an in-plan income guarantee numbered 3 million. That’s up 32 percent from 2013 when 2.3 million had access, representing a 28 percent increase from roughly 1.75 million the year prior.
» In addition, 33,500 plans offered in-plan income guarantees in 2014. This is up 41 percent from 2013’s total of 23,500, which in turn was up 10 percent from 2012’s figure of slightly more than 21,000.
Reading the Numbers
The percentage increases are eye-popping. However, the underlying numbers are relatively small, making those gigantic gains possible.
For example, the 71,300 in-plan elections made in 2014 represented a healthy 24 percent increase over 2013. But those elections equaled only 2.4 percent of the total number of participants who had access to an in-plan guarantee (3 million) that year.
If the guarantees were really hot, wouldn’t there be greater uptake? Not necessarily. The newness of the in-plan income guarantee market means plan sponsors and participants are still learning about the products. Knowing the drill, product experts actually have been expecting to see slow initial growth along with an increasing trend-line, as is occurring now.
A related factor is that not all participants are eligible to take the option their plan offers, at least not right away. Depending on how the option is designed, some must wait until they are, say, age 50 or 55 before being able to elect the option, Paracer pointed out. That puts a damper on deeper penetration too.
Even so, the forward momentum is unmistakable. Paracer thinks it demonstrates that U.S. employers are shifting their focus away from accumulation and toward income guarantees in the retirement savings plans they offer.
He saw the indications of this shift in a survey the researchers did of U.S. employers that have DC plans. The survey found that three-fourths (72 percent) of employers believe that “retirement readiness is an important metric to follow,” he said.
Since retirement income is part of retirement readiness, he views this as a sign that employers are now looking beyond using the DC plans for accumulation and are delving into how participants can create income from their plan assets once they retire.
Impact on the Industry
As more people become familiar with in-plan income guarantees, this will open opportunities for advisors and providers to demonstrate their value in the retirement marketplace, Paracer predicted. Some examples follow.
Education: Advisors will be able to educate plan sponsors on the guarantee options and how the products can accommodate participant needs for guaranteed income in retirement. Advisors and providers also may find themselves contributing to in-plan education programs aimed at employees or others in a company. Some advisors and company representatives may even be called upon to provide employees with personal assistance in understanding their in-plan option as well as with enrolling employees in the option.
Retirement readiness: If an advisor sees that a plan sponsor is becoming increasingly interested in retirement readiness, as recent surveys suggest, the advisor can show how the in-plan options help address that concern.
Data: Some plan sponsors may want to see data on how the in-plan options are working out. Advisors and representatives of plan providers that have been in the in-plan income guarantee market for a while might be able to accommodate that interest by showing some numbers on actual use.
Personal clients: Advisors may have personal clients in their practice who work at companies that have started offering an in-plan guaranteed income option. Some of those clients might bring questions about the option to the advisor to gain independent insight, including questions about whether the option fits into the client’s overall financial plan and situation.
Small Versus Big Plans
In general, small plans are the ones most likely to offer in-plan guarantees right now, Paracer said. For instance, in 2014, there were 31,000 small plans (with less than $10 million in assets) that offered the guarantees, LIMRA SRI found. In addition, 1,900 midsized plans ($10 million-$199 million) offered the options. Meanwhile, there were only 80 mega plans ($200 million or more) with in-plan guarantees.
This seems counterintuitive, he conceded. Normally, innovative developments come from the larger plans and trickle down to smaller plans. However, in this case, life insurers are the firms that developed the early in-plan products, he said. Since life insurers primarily serve the small and midsized employer markets, that’s where in-plan income guarantees are showing up in greatest numbers.
Going forward, he predicted, more mega plans will likely offer in-plan options. When that happens, “the products will take off.”