Retirement income products, or in-plan annuity options, have been available for over a decade but their utilization has been stagnant due to concerns about price, portability, and convertibility. With the recent market volatility in 2020 and recent passing of the SECURE Act, we have seen an industry push towards the research, development, and implementation of what are now referred to as “guaranteed income products.”
How should plan fiduciaries select and monitor these products?
Guaranteed income products bridge the gap between defined benefit and defined contribution plans. The last point of interest for these types of products occurred circa 2012, when the Department of Labor (DOL) last released guidance and brought this need to the surface. While there was little uptake at the time due to high prices and participant risk in the case of plan conversion, we are now able to revisit these concerns with some alleviation from the SECURE Act. At present fiduciaries are waiting with bated breath for the safe harbor guidance to be issued by the Department of Labor.
How do Retirement Income products work?
Many large recordkeepers and insurance companies offer, or are beginning to offer, retirement income products in one of three major categories: guaranteed lifetime withdrawal benefit (GLWB), immediate income annuities, and managed payout products.
Guaranteed Lifetime Withdrawal Benefit (GLWB)
GLWB products, true to their name, guarantee a participant to receive fixed payments for the span of their lifetime. In common practice, these products are linked to a target date series and overlayed with insurance contracts that guarantee the payout, regardless of market conditions. Participants who opt into a GLWB will make per-pay-period contributions to the product and will see it grow in coordination with the associated target date fund. The participant contributions and growth are aggregated and referred to as an income base, in which the value of the insurance contracts is then compared. At the time the participant enters retirement, the current income base is used to set fixed distributions for life.
Immediate Income Annuities
An immediate income annuity is a qualified plan distribution that allows a participant to convert their vested assets into a termed payout. This structure does not have any linkage to underlying investments but give participants the option to roll their assets directly from their target date series, or other investments, into the product to realize the fixed distribution benefit.
Managed payout products, like the other two products, offer ongoing distributions to invested participants, but these payments can vary. There are two types of managed payout products. In the first type, the total assets contributed to the product will be invested and, for the agreed term, a portion of the principal and growth will be paid out as the distribution. The second type of managed payout product offers fixed payment amounts but will pay distributions up until the remaining assets are zero.