The solution can be traded like mutual funds, delivers maximized returns and offers distribution flexibility.
By Rebecca Moore
This article was originally published by PlanAdviser
Since Annexus announced the launch of Annexus Retirement Solutions in December, the new division has focused on re-engineering the target-date fund (TDF) structure to enable the funds to provide lifetime income as part of defined contribution (DC) plans.
In partnership with Nationwide, a new solution from Annexus will enter the market by the summer that attempts to do just that. Annexus Retirement Solutions has filed a number of patents on its solution.
Recently, sources told PLANADVISER there needs to be more education and a change of thought to help 401(k) plan sponsors and participants accept the income-generation value of annuities.
Annexus Retirement Solutions says it agrees that annuities will be a big part of the future, but adoption concerns can’t be overcome by education alone. The team at Annexus believes that just as important as addressing the learning curve is the need for innovation that puts the participant’s needs front and center and makes it easy for them to adopt the products. “An add-on annuity is ultimately going to be a clunky experience and we as an industry need to do better,” the firm says.
Dave Paulsen, senior adviser at Annexus Retirement Solutions, says Annexus has been around since the early 2000s, designing lifetime income products primarily sold to individuals through financial advisers. However, with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the firm felt it had an opportunity to service participants of DC plans.
“We found an innovative way for an annuity product that provides lifetime income and growth and can be traded every day just like mutual funds,” Paulsen says. “Our Lifetime Income Builder product is embedded inside TDFs that have other underlying holdings. Lifetime Income Builder will not only earn returns that grow a participant’s assets, but it will apply a lifetime income amount of 6% of assets when the participant retires. We see our solution as the next generation TDF.”
Charles Millard, senior adviser at Annexus Retirement Solutions, says in-plan annuities are investments; participants’ assets grow and it maximizes returns.
Paulsen explains that the growth component of the Lifetime Income Builder solution is tied to an underlying index—it could be as simple as the S&P 500 or it could be something more custom. There is no downside risk, so if the market goes negative, participants don’t participate in that negative return. It provides a higher return than participants would get in a fixed annuity, he adds.
In the previous conversation with PLANADVISER in which sources emphasized the importance of education, Tim Walsh, senior managing director at TIAA, said he believes 401(k) plan sponsors can get more comfortable with annuities through three concepts: behavioral nudging, institutional pricing and flexibility.
Millard says when he read Walsh’s summary, he thought to himself “those three things are built into Annexus Retirement Solutions’ Lifetime Income Builder.
“Plan sponsors can use it as the plan’s QDIA [qualified default investment alternative], and it’s not something participants can’t get out of,” he continues. “It also allows plan sponsors to feel more comfortable defaulting participants into it because participants can’t argue that they can’t get out of it.”
Lifetime Income Builder has all the flexibility participants want, Paulsen adds.
“At retirement, it offers options they would have with any other investment—they could cash out the accumulated value, roll over to another plan or IRA [individual retirement account] or begin taking income when it makes sense for them,” Paulsen says. He explains that participants can turn the provision of regular income on and off whenever want to. The investment is completely flexible and liquid so each person can determine what is right for them.
Paulsen says the retirement income industry has made it cumbersome to have participants elect guaranteed lifetime income. “For example, asking them how much income they need in retirement—most participants don’t know,” he says. “By embedding the guaranteed income solution in a TDF and having the assets be professionally managed, there is no difficult decision for participants other than when and how to take distributions. It addresses all the issues in the prior article.”
Although Annexus Retirement Solutions says adoption concerns can’t be overcome by education alone, it emphasizes that increasing awareness is still important.
The Lifetime Income Builder product is designed to be easy to understand, Millard says. “If participants are defaulted into the TDF, they only have one decision: whether they want to take the guaranteed income payments when they retire. If they are not defaulted, they have two decisions: whether they want the lifetime income guarantee of the investment and how much they should contribute to it,” he says. “They don’t have to decide what their asset allocation should be or whether they have to give up control of their assets.”
More people should understand the need to have guaranteed income in retirement, Paulsen says. “I would argue this is as necessary as oxygen,” he adds. “They should determine how much they need, whether there is a gap and how to fill that gap. That is the education piece the whole industry is missing that we will deliver with the Lifetime Income Builder solution.”
Paulsen adds that the solution was financially engineered with the participant in mind first. “When you look at participants’ true needs, only then can you deliver innovative products,” he says.