Over five years after the SECURE Act came into force, Americans have been able to save for retirement through annuities as more employers shifted to offering lifetime income options. This trend has boosted confidence among plan sponsors, with 76% of them expecting demand for annuities to grow significantly by 2030.
With rising demand for financial security and stability, the integration of annuities in retirement plans can reduce income risks and enhance both plan value and confidence of participants. But there are several nuances to them that plan administrators would need to know beforehand to navigate the complexities surrounding it. Let’s dive in and learn more about annuities and how they can elevate global retirement offerings!
Annuities and Their Role in Retirement Planning
An annuity is a contract designed to provide a regular, guaranteed income stream for participants either over a specified period or for the rest of their lives. They are often funded in advance, either through lump-sum payment or through regular premiums every year. When participants make regular payments, they receive a set amount of money periodically in return as per the timeline specified in the annuity contract.
To fit the needs of diverse retirement goals, participants can choose between several annuity types:
- Fixed annuities: The participant is paid a fixed amount at regular intervals for a definite length of time or until their death.
- Variable annuities: The participant is paid a varying amount for a definite length of time or till their death. The amount received depends on profits earned by cost-of-living indices or profits earned by annuity funds.
- Qualified employee annuities: They are purchased by employers for employees under a plan that meets specific Internal Revenue Code requirements.
- Tax-sheltered annuities: A special annuity plan purchased for employees of public schools and tax-exempt organizations.
- Indexed annuities: Sharing properties of both fixed and variable annuities, they offer a minimum guaranteed interest rate combined with an interest rate linked to a market index.
In short, the purpose of annuities lies in protecting participants from longevity risk – the possibility of outliving their savings, which is a top concern for nearly two in three Americans.
Why Integrate Annuities into Global Retirement Plans?
Incorporating annuity plans in retirement plans can be a solid step towards securing a better financial foundation. And this market is also expected to grow strongly, with total sales projected to exceed $400 billion by the end of 2025. As the retiree population in the US increases, plan administrators are tasked with mitigating market volatility and longevity risks while also offering flexible payout options.
The benefits of annuities go two ways:
1] For Recordkeepers
- Regulatory compliance: Annuities help meet evolving compliance requirements, seamlessly addressing income security concerns.
- Fiduciary benefits: Reduces plan fees and overall plan value through institutional pricing and oversight.
- Flexibility and portability: Modern annuity products can be designed and customized to fit diverse participant needs and international plan structures.
2] For plan participants
- Lifetime income security: Annuities provide a guaranteed income stream, mitigating the risk of burning through retirement funds.
- Tax benefits: Many annuity contributions are tax-deductible, meaning investments grow with minimal to zero taxation and premiums paid are deducted from annual income.
- Income diversification: They can help tackle fluctuating market conditions when combined with other instruments like social security, stocks, bonds, etc.
Thus, incorporating annuities bridges the gap between saving and spending, making retirement plans more resilient and comprehensive.
Key Considerations for Recordkeepers when Integrating Annuities
While annuities offer a range of benefits, they may not be straightforward to incorporate into retirement offerings. Successful integration requires careful planning and execution, which is the fundamental responsibility of plan administrators to consider as participants maximize contributions to their 401(k) plans.
Risk tolerance of participants: Not all participants share the same comfort levels with investment risks. Hence, plan administrators will need to assess their risk tolerance to analyze which annuity type would be best.
Allocation strategies: This involves diversification of investments, where administrators find the right balance between annuities and other investment options to enhance growth potential and income certainty.
Provider evaluation: Plan administrators need to assess the provider’s reputation, fees, and customer service plans to boost participant trust and ensure plan stability.
Transparency of costs: Annuities often come with a range of fees, commissions, and hidden charges. These costs need to be clearly communicated to participants so they avoid surprises and invest with confidence.
Estate planning goals: Life expectancy of participants may also need to be taken into account to ensure their retirement income lasts as long as possible, and whether they are willing to leave money to their heirs or not.
The Path Forward to Annuity Investments
The guaranteed income, tax advantages, and customization offered by annuities make it a powerful addition to any retirement plan. However, annuities aren’t a one-size-fits-all solution as plan administrators must thoughtfully balance income guarantees with flexibility and participant preferences. This is where Congruent’s Retirement Edge plays a role in your strategy.
Designed to meet the growing demand for guaranteed income within defined contribution plans, Retirement Edge enables any retirement plan to offer “in-plan” lifetime income investment options to participants. It automates the entire participant journey – from enrollment and education to investment selection and statement reporting. To learn more about how Retirement Edge can help you provide participants with the confidence of lifetime income, contact us today!
