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What’s Holding Retirement Income Options Back?

Retirement Income

In the post-SECURE Act 1.0 era, plan consultants are becoming more comfortable recommending retirement income options, but a new study suggests there are potential obstacles with newer solutions. 

Following passage of the SECURE Act in December 2019, more than 8 in 10 (82%) defined contribution (DC) retirement plan consultants report that they have gotten more comfortable recommending retirement income options to their clients, according to MetLife’s 2023 Retirement Income Pulse Check study. In addition, most (93%) have taken some action regarding retirement income options.  

Among the actions advisors have taken:

  • 68% have conducted due diligence/evaluated the guaranteed retirement income options available in the DC market;
  • 63% have met with their clients’ investment committees to discuss the addition of a guaranteed retirement income option; and
  • 48% recommended that their clients consider incorporating a guaranteed retirement income option in their DC plan.

“Since SECURE 1.0 made it easier to offer retirement income options in DC plans, we’ve seen both consultants and plan sponsors become more comfortable with these solutions,” says Roberta Rafaloff, MetLife’s Vice President for Institutional Income Annuities. “In fact, our study found 60% of consultants say they are likely to consider purchasing an annuity option for themselves, showing they understand the security these solutions offer retirees.”

Mind you, to qualify to participate in the survey, consultants had to be at least somewhat knowledgeable about various DC plan retirement income options and had to be open to recommending retirement income at least occasionally.

Meanwhile, consultants report that plan sponsors are taking action as well, with 56% stating their plan sponsor clients have conducted due diligence and 55% state their plan sponsors have met with their investment committees to discuss the addition of a guaranteed retirement income option. In addition, 4 in 10 (40%) say their plan sponsors have issued a Request for Proposal/Request for Information from insurance companies/annuity providers.

Potential Obstacles

Yet even though consultants and plan sponsors have taken steps to incorporate retirement income options into DC plans, some potential challenges remain, MetLife further observes.  

To date, roughly 1 in 10 plan sponsors (11%) say they have incorporated a guaranteed retirement income option into their DC plan post-SECURE 1.0. Among plan sponsor-clients that aren’t yet making retirement income solutions available to their plan participants, advisors say 27% of their clients are considering offering a retirement income option in their DC plan, many within the next five years.

While low adoption rates have traditionally been attributed to lack of interest and negative impressions of annuities, nearly half (47%) of consultants say the biggest issue is that these products are complex and difficult for them to explain. This was followed by a lack of competitive pricing/cost (28%); burdensome administration (19%); lack of flexibility (15%) and concern about client reactions should things go badly/want to avoid a lawsuit (15%).

Guaranteed vs. Non-Guaranteed

Consequently, consultants cite simplicity, along with guarantees, as the most important product attributes for retirement income solutions. According to the study, nearly all advisors (96%) state that it is important (i.e., critical or very important) that the product guarantees money will not run out and the same percentage (96%) report a product that is simple and easy for participants to understand is important when evaluating these solutions.

When consultants were asked if their clients prefer guaranteed annuity options or non-guaranteed retirement income solutions, 58% “strongly or somewhat” prefer guaranteed annuity options, 23% had no preference, and only 19% “strongly or somewhat” prefer a non-guaranteed retirement income solution.

When asked to what extent do/would their clients prefer in-plan accumulation annuities as an investment option versus offering income annuities purchased by the plan participant at the point of retirement, MetLife found that the latter was slightly preferred. While 39% of consultants indicated they don’t have a preference, 34% “strongly or somewhat” prefer income annuities purchased by the participant at retirement versus only 27% that prefer in-plan accumulation annuities as an investment option in the plan.

Still, even consultants who believe their clients would prefer accumulation investment options with embedded income have concerns about target date funds (TDFs) incorporating guaranteed retirement income options. Namely, 65% of consultants cited concerns that if plan participants don’t annuitize, they will be paying for a feature they never use, while 40% pointed to such options having higher fees than guaranteed income solutions purchased at the point of retirement.  

“It may be tempting to offer products with many features to address the various potential needs of plan participants,” explains Rafaloff. “But a complex solution may not be successful, creating confusion for plan sponsors and participants. Simplicity should be the guiding principle when looking at these offerings. Immediate income annuities and qualifying longevity annuity contracts (QLAC) are products that tend to be much easier to understand.”

The survey was conducted online by Greenwald Research, in partnership with ISS Media, on behalf of MetLife between Oct. 25–Dec. 9, 2022, among 74 defined contribution (DC) plan consultants who needed to be at least somewhat knowledgeable about various DC plan retirement income options and have at least one retirement plan client with $500+ million in assets.

To access MetLife’s study, click here.