According to recent research, the majority of plan sponsors have an interest in guaranteed retirement income options, but very few are taking actionable steps toward an option—just 15%, according to a PGIM survey of 155 plan sponsors earlier this year. Meanwhile, many retirement plan advisers, though likely aware of the various options currently in the market, may still be on the fence about the fiduciary risks of implementing them with clients.
Cathy Marasco, assistance vice president and product development head for Nationwide Financial, believes there are several misperceptions held by plan sponsors, and likely some advisers, when it comes to embedding guaranteed income annuities into workplace retirement plans. The team at Nationwide, she says, have been on an industry campaign to combat these “myths” around a product Nationwide sells and also makes available as a recordkeeper.
“We are obsessed with participant outcomes,” Marasco says. “And you can’t be obsessed with outcomes without being obsessed with lifetime income options that give participants confidence in their retirement.”
Below are Nationwide’s six myths about retirement income, along with their myth-busters:
Myth No. 1: In-plan guaranteed income options are too complex.
Myth-buster: “Many of these solutions are structured as a target-date fund held within a collective investment trust,” Marasco says. “[Plan sponsors] are very used to TDFs as a simplified participant experience.“
Marasco notes that more than half of plan sponsors have expressed interest in guaranteed income in TDFs in Nationwide surveying. But many probably don’t yet realize they are available as legitimate products on the market, she says.
Myth No. 2: Fees passed on to employees are too high.
Myth-buster: “The truth is that the overall cost is typically lower than [a retail annuity] offered outside of a plan,” Marasco says.
The product head notes that a retail variable annuity with a lifetime income option generally has fees greater than 3%. Meanwhile, a so-called “wrapper solution” within a plan can range from 1.29% to 1.33%. Offerings available through a CIT, such as the TDF vehicle Marasco mentioned, can generally provide even lower fees, as they are only available within defined contribution retirement plans.
Myth No. 3: Administrative costs are too high.
Myth-buster: Marasco admits there is some additional fiduciary work to evaluate and adopt in-plan income solutions. But she argues that implementation does not require any explicit additional costs, and reviews should be in-line with the usual fiduciary process of exploring the best possible options for participants.
“Nationwide has an education series for advisers and consultants … to help them with the framework for evaluating these guarantees from a fiduciary perspective,” she says.
Myth No. 4: Annuities carry increased fiduciary responsibility.
Myth-buster: For this response, Marasco turns to provisions in the Setting Every Community up for Retirement Enhancement Act of 2019 that opened the door to in-plan options. The first SECURE legislation provided fiduciary safe harbor guidelines for plan sponsors in the selection and ongoing monitoring of guaranteed lifetime income products and the insurers who provide them.
Advocates of the solution have equated the move to the 2006 Pension Protection Act’s legislation allowing for target-date funds to be used in retirement plans.
Myth No. 5: Employees aren’t interested.
Myth-buster: Marasco turns to Nationwide research countering the perception, noting that almost 60% percent of participants are, in fact, interested in a guaranteed lifetime income investment option. Further, the research found that almost nine out of every 10 participants are ready to start with such an offering once their employer offers it.
Myth No. 6: In-plan lifetime income options are not portable.
Myth-buster: Here again, Marasco notes the SECURE Act. The legislation, she notes, removed barriers that prevented retirement rollovers for plans without a separation of service. In short, a participant can take an annuity with them, though as a rollover and not ported directly into their new workplace plan. In instances when plan providers are partnering on the option, a participant can port a retirement income product over. As of now, that is a relatively limited pool, but one she believes will grow in time.