Why The Search For Alternatives Is Good For FIAs
February 18, 2015 by Linda Koco, linda.koco@innfeedback.com
The increasing interest in alternative retirement plans is opening doors for greater use of fixed index annuities (FIAs).
That’s according to Jim Poolman, the executive director of the Indexed Annuity Leadership Council (IALC), who pointed to use of FIAs in teachers’ defined contribution plans, such as 403(b)s, as an example. Two of IALC’s member companies are active in this market, he said in an interview.
Formed in 2011, the IALC is a trade group that focuses on providing education about FIAs to the general public, policymakers, the media and others. It is comprised of five FIA carriers.
The underfunding problems in traditional defined benefit (DB) pension plans is fueling the search for alternative forms of saving for retirement, said Poolman, who is a former North Dakota Commissioner of Insurance.
Looking for options
The underfunding problems are long-standing, especially following the last recession, and have reached the point where many employers who still have DB plans are looking for options.
Despite market returns of $81 billion, the 100 large corporate pension plans that Millman follows saw a $105 billion increase in deficit in their pension funded status, the researcher reported in January.
Underfunding issues are a particular problem in state government pension plans, where taxpayers and/or employees may be asked to pay more to catch up their DB plans, Poolman said. “Taxpayers are not always happy about that.”
So the search for alternatives is on. Poolman noted that one of the often-cited alternatives is defined contribution (DC) plans like 401(k)s. They have been the DB alternative of choice for employers leaving the DB market for many years. Assets in these plans have increased to $5.9 trillion at year-end 2013 from $7 trillion in 1995, according to the 2014 Investment Company Fact Book.
Other options that employers are considering are 1) to offer employees who are in the DB plan a lump sum buyout; and/or 2) to purchase an annuity to take over the benefit funding.
Those options have legs. Roughly half (47 percent) of nearly 250 employers representing 6 million employees told Aon Hewitt recently that they are planning to initiate a lump-sum window in 2015 for terminated vested participants. In addition, more than one-fifth (21 percent) said they are very or moderately likely to explore purchasing annuities for some participants.
Poolman sees FIAs fitting into this world of change for businesses that want alternatives.
One possibility is for a business to focus on offering retirement education programs that inform employees of the many ways they can save for retirement. This education would include, but not be limited to, discussion about FIAs with guaranteed lifetime withdrawal benefit (GLWB) riders, he said.
An employer could offer to contribute to the employees’ FIAs with GLWB, Poolman said, adding “this doesn’t have to be in a qualified plan.”
As he pictures it, a business can promote the importance of retirement savings whether it’s inside a qualified plan or somewhere else, such as a retail FIA. The business would focus on education, he said.
“The employer won’t say, ‘here’s an FIA for you,’” he said. “Rather, the employer will say, ‘think about your financial future.’”
More markets for FIAs
Three other areas for growing FIA sales are rollovers, the millennial market and the women’s market, Poolman said.
Rollovers. When they leave an employer, some people will not want to keep their money in the former employer’s DC retirement plan, he said, and those in the pre-retirement years of 55 to 65 will likely be looking for options to turn that money into a lifetime income stream. “The FIA can provide that, and the guarantee will be attractive to them,” he predicted.
Millennials. If they are working at companies that are changing their existing plans or no longer offering a retirement plan altogether, millennials will look for other places to save. They will search for risk-averse growth potential, Poolman said.
Assuming that millennials have been exposed to education about the role of FIAs in financial and retirement planning, “I think the FIA will be attractive to them,” he said. This is because of the product’s upside potential and downside protection, along with its ability to provide a guaranteed lifetime income stream in retirement.
The industry will need to take responsibility for providing this exposure, Poolman contended. Some suggestions include providing educational materials and resources about FIAs on websites and in electronic media geared toward millennials. He pointed to Twitter, postings at the IALC website and content hosted elsewhere too.
Women. Poolman believes women will become a bigger part of the FIA market, especially as spousal retirement benefits dwindle. “Many women are employed today, and they are recognizing that their existing plans are not designed to cover their desired level of retirement income,” he added. So they will be looking for alternatives to boost that level, he said.
The spur of state pension plans
In state government, “states are really struggling with their pension plans,” Poolman said. As a result, they are looking into offering other options for employees to consider. These are options that will enable employees to take “closer control” of their finances within the plans.
One example he cited is his home state of North Dakota. It is slowly opening up to discussion about allowing certain classes of employees to opt out of the state’s defined benefit plan for a 401(k) plan and a supplemental 457 plan, he said.
Some states already have enacted laws along those lines. In 2012, for instance, the National Conference of State Legislatures said seven states had enacted “sweeping structural pension reforms” that year. One of them, Virginia, established a hybrid plan that requires each member to make contributions to both the DB and the DC components.
Poolman believes such changes help spur people to think about alternatives, which might include FIAs, perhaps as supplements to other retirement resources.
