Over the past five years, scores of articles have been written about the aging U.S. work force and the impending retirement savings crisis.
Less has been written about a new breed of retirement income solutions and the tremendous opportunity these emerging products provide for employee benefit brokers.
Consider these facts:
- 77 million baby boomers will reach retirement age in the next 30 years.
- Americans are living longer than ever before. For couples reaching age 65 today, there is a 50 percent chance that one of them will live beyond 92, and a 25 percent chance that one will live beyond 97.
- The solvency of the Social Security safety net remains uncertain without significant changes.
- The average Social Security retirement benefit hovers at around $1,000 per month.
- Defined benefit pension plans that guarantee lifetime retirement income are not available to the majority of today's workers.
- The majority of today's work force ranks "outliving their savings" as their greatest retirement fear (according to a recent MetLife employee benefits trend study).
Clearly, the burden of retirement planning and funding has shifted from the employer to the individual. Yet, employers have the opportunity to offer voluntary programs that will enable employees to protect themselves against their greatest retirement fear. Brokers have the opportunity to educate their customers and deliver solutions to the marketplace.
WHAT ARE INCOME ANNUITIES?
Income annuities, also known as payout, or immediate, annuities turn retirement savings into guaranteed monthly income streams.When an individual buys an income annuity, the risk of outliving his assets in retirement is transferred to the insurance company, which pools the risk by applying the law of large numbers.
Put another way, if life insurance offers protection from an early death, income annuities offer protection for a long life.
Most financial planners recommend clients limit their annual retirement spending to 3 percent or 4 percent of their nest egg, to reduce the chance of running out of money in retirement.
However, this strategy is far from foolproof. As evidenced by the dot-com bust, stock market corrections can have a devastating impact on retirement savings. What's more, none of us can predict how long we will live.
Income annuities offer dual rewards. They give purchasers the benefit of more income than a 3 percent or 4 percent withdrawal strategy will produce initially. They also guarantee an income stream for life.
In addition, income annuities offer flexibility in their plan design to accommodate the specific needs of the purchaser. Liquidity options allow purchasers access to their money in an emergency, and payout options can provide payments to spouses and other beneficiaries after the death of the primary annuitant.
Cost-of-living provisions allow participants to protect their savings from inflation. Because income annuities offer protection from a declining stock market, a retiree is able to keep a portion of retirement assets invested in higher-risk, higher-return investments.
WHY OFFER INCOME ANNUITIES?
Roughly half of America's largest companies and about a third of companies with 500 or more workers offer income annuity products to their employees. Many employers realize their work force faces huge hurdles in navigating the process of financing 20 or more years of retirement.
Some employers are concerned about possible legal issues stemming from former employees who have no retirement savings despite a lifetime of work, especially if these employees weren't offered education and resources for the distribution phase of retirement planning.
The passed Pension Protection Act of 2006 made it easier for employers to include an income annuity as a plan distribution option from their 401(k) plan. Employer-sponsored income annuity options enable retirees to get more for their money than higher-cost retail offerings. There's no cost to the employer to make these products available, and there's typically no minimum participation requirements.
HOW CAN BROKERS CAPITALIZE?
By the end of 2010, the defined contribution market is expected to grow to around $5 trillion in assets -- and retiring employees must find ways to convert these assets into income. With income annuities, employee benefit brokers can leverage existing customer relationships to capitalize on this retirement distribution opportunity.
The workplace traditionally has been the outlet where employees fund their retirement through payroll deduction. Offering solutions for the distribution phase of retirement gives brokers another way to add value and solidify their customer relationships.
For brokers, income annuities offer an easy-to-articulate solution to funding retirement: In exchange for a lump sum purchase, you will get guaranteed monthly payments for as long as you live. To support brokers' sales efforts, institutional income annuity providers offer tools to help educate employees about retirement planning. Call center employees trained in retirement planning combined with robust Web sites offer interested employees the support they need, in a manner they are comfortable with. Giving employees access to these resources frees HR departments and benefit brokers from the day-to-day administration of these programs.
In the not-too-distant future, more money will be coming out of than going into retirement plans. Income annuities offer a huge opportunity for benefit brokers to participate in, and add value to, this process -- and they will be rewarded for their effort.
