By Charles E.F. Millard
This article was originally published by NAPA.
During its strike, one of the UAW’s demands has been that the auto companies restore traditional pensions. Less well-known, but noted in published reports, is that the negotiations have also contemplated adding a lifetime income option in their 401(k) plans. It should be a no-brainer for auto companies because numerous lifetime income solutions are available. The auto companies and thousands of other employers should use them.
Traditionally, annuities have been perceived to be expensive and irrevocable. They were too complex, sacrificed growth, and were sold too aggressively. But about four years ago, Congress passed the SECURE Act, which encouraged using annuities and other lifetime income solutions inside 401(k) plans and other Defined Contribution plans. Since that time, leading asset management firms and leading insurers have developed a variety of lifetime income solutions that can work to address the concerns of the UAW.
These new solutions have institutional pricing; they are not sold to individual investors and are designed to fit into the 401(k) plan and provide lifetime income. Thousands of employers and hundreds of consultants and plan advisors are considering adopting these solutions. Some have already adopted them as the default in their DC plan, and soon this will be the norm. The auto companies can help lead the way.
Employers and their consultants have a hard time evaluating the competing solutions, but in reality, there are four key considerations that any employer should consider.
Some lifetime income solutions sacrifice growth. The participant is required to annuitize at some point in the process. This means that her funds go to the insurer, and she will receive a specific payment in the future. However, if markets rise and their returns are strong, that participant will have sacrificed growth.
So, plan sponsors should evaluate the likely overall outcome for a participant’s portfolio growth. Compare competing solutions and compare them to existing target date funds that are already in use in the DC plan.
Some lifetime income solutions are irrevocable. This may be acceptable as a trade for income security, but it is one of the principal reasons that people don’t like annuities. Most lifetime income solutions developed since the SECURE Act have some degree of irrevocability, while others are fully liquid — even if the participant is in pay status.
Most plan sponsors will not want to put employees into something they cannot get out of, and most employees will not want such a solution. Fortunately, not all lifetime income products require annuitization. This is a tremendous innovation. So, look for the ones that have full liquidity.
Ease of Use
Some employees want complete control and all decision-making on their shoulders in their DC plan. That is fine, but most want to set it and forget it. For most participants, the following questions cause paralysis: Should I annuitize now or late? How much should I annuitize? Is this the right annuity for me? That kind of paralysis is the enemy of good outcomes. The complexity our industry worries about is really most at play when we ask participants to make these complex decisions,
Some solutions are target date funds. Like any other target date fund, they require no decision by the participant. If the participant does nothing, the assets gradually glide into a lifetime income solution, and the participant benefits as a result. Look for the solutions where inertia is your friend.
Employees change employers, and employers change recordkeepers. Among the competing solutions, there are many differences in how portable the solution is. Look for the solutions that have individual portability for the employee and for the ones that make it easier for the new recordkeeper to adopt if the employer changes recordkeepers.
During a strike, it can be challenging for employers and employees to get together to examine these kinds of choices. But with some work and analysis, the UAW can get what it wants, and the auto companies can be proud of what they provide.
Charles E.F. Millard is the former Director of the U.S. Pension Benefit Guaranty Corp. and a Senior Advisor for ARS.