The retail annuity market experiences significant growth quarter after quarter, each year. Although this exponential growth can be attributed to many economic factors, high interest rates and product innovations play a significant role.
According to an industry report by LIMRA, total US annuity sales in the first quarter of 2024 stood at $215.2 billion, a 19% increase from the previous year. This marks a record high in sales since 1980, and the industry has consistently outperformed itself for the past 15 consecutive quarters since the onset of the pandemic.
Despite the growing popularity, the annuity buying process is complex and time-consuming. If a customer wishes to exchange the annuity with another carrier, the process typically takes between two and four weeks. This process is too long and complex for both the buyers and plan administrators.
Digitization is an efficient solution to overcome these problems and make the process more efficient and user-friendly. This blog outlines the benefits of digital annuities and how they can improve operations for plan administrators.
Traditional Annuities in the Retirement Plan Industry
Annuities provide a reliable and guaranteed income with tax benefits, making them an attractive option for retirement planning. Traditionally, annuities have involved paper-based processes and manual administration, relying more on in-person interactions.
While they have offered innumerable benefits, these complex and time-consuming processes have made it overwhelming for both plan administrators and participants.
Key Challenges With Traditional Annuities
- Lack of standardization: Different providers employ varying terminologies and definitions for similar concepts, resulting in confusion and misunderstandings. Moreover, their data formats differ, making them incompatible for integration with other systems. This limits their interoperability and the ability to develop innovative industry-standard solutions.
- Complex sales and exchange processes: Traditional annuities involve extensive manual processing and paperwork, which is both time-consuming and prone to errors. Additionally, the sales and exchange process involves multiple parties, such as carriers, distributors, and financial advisors, which increases complexity.
- Regulatory complexities: Annuities are subject to unique regulations that differ from those governing other financial products. Providers must comply with specific disclosure requirements to provide sufficient information for customers and help them make informed choices. This increases the complexity and operational costs for the annuity providers.
The Solution: Digital Annuities
Like any other industry, advanced technologies such as AI and Blockchain significantly impact the financial services industry. By leveraging these technologies, the industry can address these challenges head-on and create a more accessible, personalized, and secure retirement planning experience.
The Insured Retirement Institute (IRI) has implemented a “Digital First for Annuities” strategy that would standardize the process across the industry. This approach involves leveraging technology to streamline the entire annuity process, from sales and purchase to management and claims.
What is the goal of the Digital-First approach?
The Digital-first approach stresses the importance of meeting the customers and financial professionals where they are, on digital platforms. It leverages automation and other digital tools to reduce manual work and streamline the process.
The IRI is working towards:
- Creating industry standards: Develop standardized data formats and processes that would facilitate interoperability between providers and platforms.
- Promoting digital adoption: Encourage annuity providers and distributors to adopt digital solutions and new technologies.
- Enhancing participant experience: Offer online tools and resources to participants, thereby improving their overall experience.
The “Build Once, Use Many” Model
Annuity providers have been developing one-off integrations for themselves that are often incompatible with various financial planning and wealth management platforms. Annuities should be included among the tools that professionals, such as financial advisors, use.
The digital-first strategy implements the “Build Once, Use Many” model, and the IRI aims to reduce the burden on the carriers by creating standardized rules of engagement for data delivery. These reusable standards, which work collectively, can benefit the financial advisers selling the product.
It enables faster transactions, easier management of annuity products, and boosts innovation. By building the product once and leveraging it across the industry, carriers can reduce costs and increase efficiency.
Paperless Replacement Program
Paperless replacement is one of the initiatives under the digital-first approach run by the Depository Trust & Clearing Corporation (DTCC). This program enables the paperless transfer of asset requests between carriers, significantly reducing order processing time from multiple weeks to under 72 hours.
Benefits of Digital Annuities for Retirement Plan Administrators
- Enhanced efficiency: Digital platforms can automate numerous manual tasks, including data entry, document processing, and account updates. This reduces error, improves accuracy, and reduces non-compliance risks. Digitizing also helps streamline operations, speed up the processing times, and improve participant satisfaction.
- Improved Accessibility: Participants can access their annuity account anytime, anywhere, through user-friendly online portals. These platforms offer self-service options, allowing participants to manage their accounts independently. They also provide personalized tools and resources that help the participants make informed decisions about their retirement savings.
- Enhanced compliance: Digital platforms can implement robust security measures to protect participant data and comply with regulatory requirements. They provide a clear audit trail, making it easier to track transactions and address potential compliance issues promptly.
- Cost savings: Digital solutions reduce administrative costs and improve operational efficiency, thereby reducing the cost for the participants. Digital annuities can also scale quickly to adapt to growth in plan participation without substantial change to costs.
- Seamless integration: Digital annuities can be seamlessly integrated with other retirement plan systems, such as recordkeeping systems, investment platforms, and participant portals. This helps improve data management, reduces the likelihood of errors, and provides a unified experience for participants.
By embracing digital annuities, retirement plan administrators can provide their participants with a more efficient and personalized experience.
The Road Ahead
Digital annuities offer significant benefits for both retirement plan administrators and participants. The combined effort by players in some parts of the entire annuity supply chain to digitize the ecosystem is a significant step towards modernization. Congruent’s IPX Retirement Edge enables any retirement plan to offer “in-plan” lifetime income investment options to participants. IPX Retirement Edge facilitates the entire transaction, from participant enrollment, education, and investment selection to policy issuance, cashiering, and statement reporting.
