Is now the right time to add annuities to your DC plan?

It’s no secret that as the cost of guaranteed Defined Benefit (DB) plans increased for employers; new ways, such as Defined Contribution (DC) plans were created to reduce costs, and unfortunately are not guaranteed. But employees, in order to secure their retirement funds, are left to invest for themselves and ride the uncertainties of the markets.

A new report from TIAA, Separate facts from perception: The valuable role that in-plan annuities can play in retirement SECURE-ity, sheds light on how annuities can provide peace of mind for workers as they approach retirement.

In the modern era, life expectancy has increased dramatically. According to TIAA’s 2022 dividend mortality tables, there is a 50% chance a single person age 65 will live to age 90 and about a 25% chance they will live to age 95. When you include a same age spouse or partner there is about a 45% chance that one member will live to age 95. Longer lives mean there is a need for a longer lasting retirement income. In 2020, 63% of Americans’ qualified assets were in IRAs and DC plans, up from 48% in 2000. As a result, “it is no longer the case that the majority of American retirement assets are professionally managed for the explicit purpose of providing consistent, predictable lifetime income to last throughout retirement,” says the report.

As this trend continues, Americans require that DC plans offer some source of guaranteed lifetime income (much like the previous DB plans). One solution is to provide annuities as an investment option – something Washington agrees with, with the bipartisan support of the SECURE (Setting Every Community Up for Retirement) Act, passed in 2019. The Act is meant to create a more conducive environment to including institutionally priced in-plan annuities inside DC plans.

The SECURE Act includes an improved fiduciary safe harbor for selecting insurers to provide lifetime income solutions inside DC plans; it allows DC plans to adopt provisions allowing for portability of lifetime income options if the lifetime income option is removed from the DC plan menu; and it requires an annual lifetime income disclosure that translates account balances into expected income streams to be delivered to participants.

Read more: Confidence in retirement security drops dramatically across demographics

Annuities come with many myths such as: they are too hard to implement, participant use is low, bad for meeting retirement needs, expensive and so on. The truth is, according to the report and research within the report, these misconceptions are simply that – misconceptions, and are relatively easy to implement while providing a reliable source of guaranteed income within a DC plan. Annuities are also the only currently available commercial product that enables risk pooling. As the population ages, has fewer guaranteed income sources, and potentially outlives their savings, it’s the right time to consider newer alternatives that can help employees retire with confidence.