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For retirement plan participants, as well as many sponsors, it's safe to say that guaranteed lifetime income products are the least-understood financial offering. How can they tell which ones are predatory vs. those that are beneficial? This Q&A with Pat Rowan aims to consider some questions around that topic. Rowan is senior managing director of retirement income strategies and products at TIAA.

BenefitsPRO: What are some of the key factors to making sure you're prepared for retirement given the current health and financial crisis?

Pat Rowan: The current crisis is a reminder of why securing a portion of your savings in a guaranteed income solution during your savings years can be particularly important. As the crisis unfolds, we are reminded that as we save for retirement, we are still susceptible to many unknown factors like market events that can impact an individual's timeline for retiring. Annuities are growing in popularity as people recognize they can take a portion of their retirement savings and secure a stream of retirement income that will last as long as they live, like a pension.

A fixed annuity also provides stability and guaranteed growth during the accumulation years. While annuities help solve for many years in retirement, market swings, and cognitive impairments, you have to be smart about how you make your selection since not all annuities are the same.

How can people differentiate between different types of annuities, like retail and in-plan?

Retirement plan annuities or those sold as in-plan options to participants in retirement plans are typically low-cost options. They actually have lower costs than many other investment options because they utilize economies of scale to keep pricing low. At TIAA, 90% of our annuities have expense ratios in the bottom quartile.

On the other hand, retail annuities—available outside of group retirement plans—may have higher fees and are the ones that can have high sales loads (commissions), high surrender charges, and high investment expenses.

It's also important to evaluate the insurance company providing the guarantee. You'll want to know they can deliver on their promise of income for life by checking on their strength with rating agencies.

Are there certain investment products that tend to have higher fees than others?

When reviewing annuities, individuals should review the fees and riders associated with each product. We believe it is best to focus on products with no sales commissions, surrender charges, and low mortality expenses.

We encourage individuals to review any fees or costs of a solution in connection with the outcomes they provide. For example, an index mutual fund may be very inexpensive and provide market exposure, but it doesn't guarantee any income for individuals in retirement.

Is there a right time to add guaranteed lifetime income to your retirement plan?

Many people incorrectly believe that annuities should only be considered at retirement or shortly before. It's important for individuals to understand the value that annuities present to them during their working years (and not just at the moment of retirement). By allocating a portion of savings to a guaranteed income solution in an employer sponsored retirement plan, like a fixed annuity, you are building a meaningful income source for retirement.

First, you're signing up for a guaranteed rate of return. The rate of return will never be lower than that amount and, for TIAA, it is historically higher than the guaranteed minimum. A guaranteed minimum provides "confidence," especially as you near retirement – a time when you no longer receive a regular paycheck.

Second, investing a portion of your savings to a fixed annuity gives you the flexibility to allocate additional money to other riskier asset classes. This could mean investing in equity mutual funds or a low-cost variable annuity where an individual can get market exposure, potential growth and the added benefit of income that can't be outlived.

Is there a specific type of investor or generation you believe would benefit most from guaranteed lifetime income in today's current environment?

It may be surprising to some to learn that all generations can benefit from guaranteed lifetime income. For the youngest savers, accumulating a portion of their savings in a guaranteed lifetime income solution can help them build an income stream that acts like a pension in retirement. For people nearing retirement, it can be prudent to take a portion of their assets and put them in a lifetime income solution to be insulated from market volatility.

What should benefits managers and retirement advisors take into consideration when advising participants about lifetime income options?

Plan sponsors and retirement advisors can play an instrumental role in advising participants about the unique benefits of lifetime income offerings as a part of a diversified retirement savings strategy, and it's not an all or nothing proposition.

They can also help drive participants towards retirement readiness. Since these individuals are directly communicating with participants, they can help participants understand which investment options can align with their goals and time horizon.

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How to look at guaranteed lifetime income products: predatory vs. beneficial

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