In-plan annuities: Are they the next big thing in retirement plans?

Changes in legislation, technologies, and attitudes are all playing a role in the growing popularity of annuity products, according to a webinar sponsored by LIMRA. Bryan Hodgens, head of distribution research, life and annuity research at LIMRA gave the online presentation, called “In-plan annuities at a tipping point/?” last month.

Hodgens noted that interest in in-plan annuities has been rising, and that a range of products are coming on to the market or have been introduced in recent years. The interest is not just among industry players in the field; rank-and-file workers are also interested in this option. A LIMRA 2023 Retirement Investors Study found nearly 70% of non-retired workers said they would be somewhat or very likely to select an in-plan annuity option, in order to create a guaranteed income stream in retirement.

“Since the SECURE 2.0 Act passed in 2020, there’s been a lot of new, innovative products that have been coming into the market,” he said. “The idea of a guaranteed income product in a defined contribution plan is actually nothing new; it’s been around for years, but really up until recently, plan sponsors have been a little reluctant to put annuities inside of a 401(a) plan.”

A new inflection point

Hodgens noted that something has changed to make sponsors and workers more interested in these products, and he said the new momentum is the result of several developments.

These include the passage of SECURE 2.0, which Hodgens called a catalyst for a lot of the new products. The new law provided plan sponsors with a level of guidance that was lacking before, Hodgens said. “The act provided a safe harbor for the plan sponsor around how they provide due diligence in selecting an insurer and monitoring the insurance company,” he said. “It also provided guidance on how to actually evaluate the inclusion of a lifetime income product into a plan and how to actually choose the annuity product.”

The SECURE 2.0 Act also provided tax credits and other incentives to create this type of plan, and helped with portability of accounts and funds, for example moving from a 401(k) plan to an IRA.

Hodgens added that a lot of changes are happening in the marketplace that also makes the in-plan annuities more attractive to sponsors and workers. The number of pensions in the private sector has dropped dramatically, he said. “There’s this declining guaranteed income through a defined benefit plan option available to consumers,” he said. “LIMRA’s research recently showed that 80% of employees expected Social Security benefits to be a big part of their retirement assets. They are looking for additional sources of guaranteed income on top of that.” The aging population also puts more attention on retirement options. Hodgens noted that this year, more people in the U.S. are turning 65 this year than have ever done so in past years, with 4.1 million Americans turning 65 this year, and an additional 4 million expected to turn 65 in each of the next two years. “Ageing population, longevity, the need for more guaranteed income… these are all reasons that consumers are looking [at these topics] a little further,” he said.

Public, industry opinion changing in favor of guaranteed income

The discussion also included data from the 2023 Retirement Investors Study from LIMRA. That study found quite of bit of interest in guaranteed income solutions such as annuities. The survey results found that 79% of nonretired workers ages 40-85 with at least $100,000 in household investable assets would be very or somewhat likely to select an in-plan annuity options.

In addition, younger workers seem very interested in such options. In the 40-49 age group, 24% said they were very likely to invest in guaranteed income solutions, with 54% saying they were somewhat likely to invest in those solutions. The results show a decline in interest in every progressively older group: 12 % were very likely and 31% were somewhat likely in the group aged 70-79.

The LIMRA study also found that there is a range of top motivations for selecting an in-plan annuity product. Among the survey respondents,

• 51% said the top motivator was increased financial security with lifetime income;
• 46% said their top motivator was knowing how much income they’ll receive in retirement;
• 42% said the top reason was that it would make a retirement plan work more like a pension; and
• 39% said being able to create guaranteed retirement income through an employer.

Related: Non-guaranteed 401(k) income solution: A new in-plan ‘annuity’ option to offer workers

“[There’s] just that confidence level that they get from having that guaranteed income source, and also being able to create that income through their employer is very attractive to them,” Hodgens said.

He also discussed moving funds to an out-of-plan option for annuities, which might appeal more to investors as they get closer to retirement.

Technology advancement another key part of the equation

In addition to growing consumer demand and supportive policy moves like the SECURE 2.0 Act, Hodgens noted that technology is also playing a rule in the rise of annuity products. “This has been building with technology advancements on the portability of the products… and just the money movement between the plan, the plan sponsor, and the recordkeepers, there have been a lot of advancement. Middleware companies… have played a big part.”

He also noted that recordkeepers have added annuity products to their platforms, which has also been helpful for the model.

And finally, Hodgens credited the plan sponsors for evolving along with the market and putting in the energy needed to educate themselves about the annuity-type products. “The companies we surveyed tended to be a little big younger,” he said, adding that older companies were also part of the trend. “We also see  those employers just believe that the guaranteed income product is necessary to help their participants to plan for retirement.”

Some of the companies may have offered pensions in the past and may now be coming back to the model because of the changes in regulation and the marketplace, Hodkens said.