How the Retirement and Annuity Industries Are Helping Employees Generate Retirement Income

With the uncertain future of Social Security and private sector pension plans’ nearing extinction, it is more important than ever that participants develop a sustainable retirement income plan. Withdrawal strategies are critical components of income plans, yet these strategies are complicated and must account for a variety of complex variables, from rising healthcare costs, to retirement lifestyles and income risk factors like longevity and inflation. The SECURE Act, signed into law in December 2019, also makes it easier for plan providers to offer annuities, providing retirees with more income options and annuity firms with new product opportunities.

Many near-retirees struggle to understand how to convert their savings into retirement income. According to Corporate Insight’s 2018 employee survey—the foundation for our 2019 Financial Wellness syndicated study—41% of respondents said they have novice-level knowledge or no understanding of retirement income; this was the most common response among those surveyed. Those left without guidance risk depleting their retirement savings or being overly cautious and needlessly lowering their quality of life in retirement. On the bright side, participants want to learn about retirement income; according to our 2019 participant survey, three of the top 10 highest-rated educational content topics address income planning. Over half of respondents considered retirement income and withdrawal strategies (63%), Social Security (58%) and retirement risks (57%) to be “very important” or “extremely important” topics.

Considering the complex nature of draw-down strategies and participants’ willingness to learn about the subject, recordkeepers should provide resources that help those who want to learn about, model or review their retirement income plans.

Recordkeepers can influence retirement readiness by offering participants the right income projection tools and resources

Considering the complex nature of draw-down strategies and participants’ willingness to learn about the subject, recordkeepers should provide resources that help those who want to learn about, model or review their retirement income plans. Income projection tools that provide decumulation analysis can be effective resources for creating draw-down strategies, but few firms within the Retirement Plan Monitor coverage set offer as much.

• Fidelity’s income projection tool—the Planning and Guidance Center—stands out, offering comprehensive analysis of how participants’ savings could deplete throughout retirement. Users can view year-over-year income projections and source-level outflows based on their goals, budgets, expenses and savings. Notably, the tool allows users to view data for different market conditions―Significantly Below Average, Below Average or Average―in today’s or future dollars. For participants already in retirement, the tool provides feedback about how their income plans account for three different risk factors: spending, inflation and healthcare.

• John Hancock’s new retirement income planning tool—My Retirement Planner—provides a user-friendly experience with comprehensive, intuitive inputs and results. Participants can view their projected monthly retirement incomes and projected monthly expenses for each year in retirement. The tool breaks down expenses into three categories—nonessentials, healthcare and basics—and a toggle lets users view category-level breakdowns of expenses. Participants can refine their projections by providing information about their health conditions, sources of income and retirement living arrangements.

New annuity products create additional income solution possibilities for retirees

Annuities could provide another income option for income planning in retirement, and the first half of 2020 has seen firms roll out the first new products closely tying annuities and defined contribution retirement plans together. While workplace retirement plans have had the option to offer annuities for years, only 10% did so as providers often saw annuities as too expensive or inappropriate for DC plans. However, with the SECURE Act offering providers a safe harbor rule, annuity sellers, investment groups and retirement plan providers are working together to create new opportunities to mix annuities and DC plans.

January saw the first such product, when Lincoln announced the release of the American Legacy Target Date Income variable annuity, marrying variable annuities and target date funds. Lincoln partnered with Capital Group to offer the annuity with access to Capital Group’s target date fund investment options (the firms have worked together since 1987 to offer the original American Legacy variable annuity). In a press release announcing the product, the firms position it as the first product to combine the income protection of an annuity with the simple investing of target date funds.

Although still combining annuities and retirement investing, the American Legacy Target Date Income variable annuity represents a funhouse mirror version of the expected effect of the SECURE Act. Whereas that legislation should make it easier for retirement plan providers to offer annuity options, Lincoln’s product instead borrows a popular option from retirement plans—target date funds—and offers it within an annuity. While the 32-day gap between the legislation’s passage and the product announcement suggests the American Legacy Target Date Income Variable Annuity is not a direct result of the SECURE Act, both the legislation and the product demonstrate the growing interest in blending the retirement and annuity industries—an interest further demonstrated by Blackrock’s partnership with Brighthouse and Equitable, first announced in May.

In what might be the first direct product reaction to the SECURE Act, Blackrock partnered with Brighthouse Financial and Equitable—two firms in our Annuity Monitor coverage group—to offer a new annuity option within retirement plans. Similar to Lincoln’s offering, Blackrock’s LifePath Paycheck ties target date funds to annuities. Blackrock’s product, however, offers fixed annuities through an employer-sponsored retirement plan, rather than simply applying borrowed retirement plan concepts to an annuity. The LifePath Paycheck allows retirement plan participants to invest their savings in a LifePath target date fund from Blackrock. At retirement, the fund provides the option for, but does not require, participants to purchase fixed annuities from Brighthouse and Equitable using the Lifetime Income portion of their portfolio, set aside beginning at age 55. The firms position the LifePath Paycheck as providing the security of a pension to DC plan participants, echoing an existing annuity industry marketing tactic.

These new innovative tools and products can help workers develop a financial plan for saving and retiring, even as the landscape of retirement evolves. We expect to see more firms roll out similar tools and products through the rest of 2020 and beyond.