Employer considerations

Plan sponsors face a plethora of questions, considerations, and decisions, including:

Deciding on types of annuities to be offered (immediate annuity, deferred income annuities/fixed deferred annuities, variable annuities, etc.), factoring in the liquidity and surrender period of the contract and any associated penalties participants may face
Evaluating annuity providers and the products on costs, complexity, and credit risk
Understanding the employer's responsibilities related to negotiating better annuity rates, reporting requirements, and ongoing monitoring of the provider and products
Assessing how annuities will be offered – only as a choice, a default option, or through a professionally managed account – and understand the implications of each

Employee considerations

Employees who have annuity options on their 401(k) platforms face a number of complex decisions:

Evaluating if an annuity is needed in their retirement portfolio and, if yes, the most suitable type and age to annuitize
Identifying and evaluating trade-offs and benefits when allocating to annuities relative to other simpler and more liquid retirement income options
Understanding the complexity of annuity product features and how they are priced
Calculating how much to allocate to an annuity product
Assessing level of comfort giving up control of assets (restricting access to future liquidity)
Understanding the liquidity of the contract as well as any penalties associated with cancelling the annuity contract early
Determining which payout option to select and why (single versus joint versus survivor benefit, period certain, etc.)

Raising the standard for retirement help

For plan sponsors offering annuities, it's critical to provide a comprehensive retirement education program for near-retirees alongside any annuity option that provides personalized advice. Given the complexities of annuities and the uniqueness of each near-retiree, providing participants access to a retirement income review with an independent advisor – who is free of product conflict – is essential to good decision making and participant success. Best practice retirement income reviews include:

Guidance on diverse types of annuities, associated costs, and other critical considerations, such as giving up control or liquidity, and deciding how much to allocate to annuities and at what age
Evaluation of annuitization decisions in the proper holistic context of household retirement plans:
Coordinating with defined benefit pension payout election (annuity or lump sum)
Ensuring participants are aware that the most attractive annuity is the annuity implicit in delaying Social Security claiming

Personalized managed accounts are in an ideal position to create retirement income focused investment strategies provided they are able to reach a broad range of employees and retirees. According to Cerulli Associates, 95% of DC recordkeeping platforms offer managed accounts. Because of their accessibility and personalized approach, managed accounts that offer access to an independent advisor are a natural building block to help navigate the complexities of annuities and all the other interrelated financial decisions near-retirees face.

Instant Insights /

The new conversation around annuities in the workplace

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