The groundswell began with little fanfare. First one major insurer rolled out a guaranteed income vehicle specifically for defined contribution plans, then another. Then came the financial meltdown, with retirement account values plummeting to such an extent that many baby boomers began to wonder if they would outlive their retirement nest eggs. By the time the dust settled, it had become painfully clear that mainstream America was staring at a potential retirement income shortfall of massive proportions.
Just how broad is the potential scope of that shortfall? The Center for Retirement Research at Boston College estimates that 51 percent of American households are at risk of being unable to maintain their pre-retirement standard of living in retirement, even if they work to age 65.
These kinds of findings have turned the subject of 401(k)-based income guarantees into a front-burner issue. And it's not insurance company marketing and PR machines putting it there. Indeed, none other than the Obama administration has started touting these annuity-like vehicles, which are designed as longevity insurance "wrappers" around defined contribution plans, as a potential solution to the looming retirement income shortfall. The buzz in Washington, D.C., about developing policies to bring lifetime income vehicles to the masses via employer-sponsored retirement plans and IRAs is intensifying.
The handful of vehicles available in the marketplace today function much like guaranteed lifetime withdrawal benefits unbundled from retail variable annuities and applied to DC plans, explains Garth A. Bernard, founder and president of Sharper Financial Group, a Boston, Mass., firm that develops retirement income solutions. "It's a very valuable benefit, because [financial and longevity] risk is being offloaded from the investor to the insurance company."
"It allows you to build your own personal defined benefit plan inside a defined contribution plan," adds Ed Eng, senior vice president for product development at John Hancock Retirement Plan Services, explaining how Hancock's product, Guaranteed Income for Life Select, combines a lifetime income guarantee with upside potential and downside asset protection.
Trouble is, however much the public and policymakers might be clamoring for these 401(k) insurance wrappers, only a few insurers currently offer them, and thus, only a small segment of 401(k) plan participants have access to them. According to Hewitt Associates, which tracks workplace benefits, just 7 percent of 401(k) plans currently offer a guaranteed income insurance or annuity solution within the construct of their plans.
"This is still a very embryonic stage we're in with guaranteed income solutions inside DC plans," acknowledges Eng.
What's more, the vehicles that are available today are largely untested and far from a panacea, says Bernard. "There's huge opportunity with these products. But capitalizing on the opportunity--that's easier said than done."