man with laptop and word Annuity (Photo: Shutterstock)

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For years, the insurance industry and advocates for guaranteed income products have been lobbyingto get fiduciary sanctuary for employer sponsors of definedcontribution plans who put annuities in investmentmenus.

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And for at least a good part of last year, that sanctuary wasall but certain, thanks to the annuity provider selection safe harbor in theSECURE Act.

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Though the slam-dunk passage of SECURE was called into questionbefore it was ultimately passed as part of a larger end-of-yearspending package, the bill always enjoyed vast bipartisan support.The conventional wisdom was that SECURE, and its annuity selectionsafe harbor, would ultimately pass into law, one way oranother.

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So it stands to reason that annuity providers were storing drypowder in the run up to SECURE's passage, ready to unleash new andimproved income guarantees to the defined contribution market,perhaps at new and improved price points.

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But that is not the case. And whether or not annuities becomemore common in retirement plans remains to be seen.

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"I do think the safe harbor will create more interest from plansponsors and drive uptake of existing options and some innovation,"said Sri Reddy, senior vice president in the retirement and incomesolutions unit of Principal Financial Group.

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"But we are still a ways out," he added. "We don't know what themarketplace will accept, or what it will demand. And mostrecordkeepers don't have the infrastructure to supportannuities."

Considering cost

Under SECURE's annuity selection safe harbor, plan sponsors canrely on the assessments of state insurance regulators to determinean insurer's prospects for long-term solvency. A previous safeharbor required sponsors to make that assessment on their own.

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That requirement spooked sponsors, who feared being on the hookas fiduciaries to retirement plans if an insurance company couldn'tmeet its future obligations, according to several industrystudies.

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While the new safe harbor extends some sanctuary for choosing anannuity, that choice is still a fiduciary function.

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And fiduciaries often get sued, especially when they run bigplans.

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For all plan sizes, 9.8 percent of 401(k) sponsors offer anannuity in plan, according to the Plan Sponsor Council of America.For the largest plan segment—those with more than 5,000participants—only 5.6 percent of plans offer an annuity.

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If that is to change, cost will definitely be part of sponsors'calculations.

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"Right or wrong, the market equates cost with fiduciary risk,"said Tim Walsh, senior managing director of institutionalinvestment products with TIAA. "I do think innovation will driveadoption of guaranteed products in the 401(k) market, but theproducts will have to be low cost, and they will have to be simple.Providers will have to keep them institutionally priced, and not gocrazy with options like lockups or surrender fees."

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In the retail market, cost and complexity are big knocks onannuities. The institutional market can address at least half ofthat conundrum. TIAA's annuities are offered in 403(b) plans for 30to 50 basis points, which includes underlying investment managementfees and the cost of guaranteeing income.

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Conceivably, costs could come down. Walsh cites pricecompression with target-date funds, as that market has surged asthe predominate qualified default in 401(k) plans.

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And he says the contemporary role of plan consultants andadvisors adds a further layer of protection for gun-shy sponsors,which could help spur adoption.

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"There's no way a consultant will put a high-cost option on aninvestment menu—they won't let sponsors do that," said Walsh.

Innovation not needed?

Product innovation may be the result of the SECURE Act. But itmay not be necessary, said Roberta Rafaloff, vice president ofinstitutional income annuities at MetLife.

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"At its core, safe, predictable and lasting income needs to bethe outcome of any retirement plan," said Rafaloff. "Putting anincome annuity into a plan is not new. We feel the most efficientway is to convert assets to an immediate annuity at retirement. Butanytime you are adding something new to a 401(k) plan, it has to becost effective, easy for the sponsor and recordkeeper, and mostimportantly, easy for the participant."

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MetLife has been manufacturing immediate annuities for 40 years.In DC plans, participants pay a lump sum at retirement for a setincome stream that does not change. Payouts can be deferred, butthe key, says Rafaloff, is to keep annuitization separate fromaccumulation.

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"That's where the confusion comes. Variable products that mixinvestments with insurance can come with a lot of fees andcomplexity, and a lot of decisions for savers," she said.

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"We don't mix insurance with the investment side, which we thinkis critical for defined contribution plans. Participants take someportion of their balance, buy an income annuity, and the remainingsavings stay in plan, with access to low cost investments," addedRafaloff.

Gas on a fire?

One development that could spur product innovation would be newguidance from the Labor Department on the role of annuities withina qualified default investment alternative. That would influenceproduct development, Principal's Reddy said.

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Applying the nuts and bolts to new annuity products, whetherthey are built into a target-date fund, or on top of a managedaccount, is not actuarially tricky, Reddy said. The real lead-timecomes with regulatory filings and the technology build-up tosupport a product roll-out, which he said is typically a nine to 12month cycle.

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Reddy expects trends to emerge within the next five years. Butwhen innovations do come, rapid evolution could follow. Reddy citedthe pension risk transfer market in the defined benefit space,which was virtually a non-existent market prior to two deals in2012. It's been parabolic since.

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"I'm hopeful SECURE will have an accelerant affect on annuitiesin retirement plans," said Reddy. "I don't think it willnecessarily be gasoline on a fire, but hopefully it's not pouringwater on the fire."

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.