Two recently published studies demonstrate the sort of shift in the “conventional wisdom” related to annuities for DC plans that needs to occur for those products to be successful in the marketplace.
One of the struggles the market continues to encounter is the limited manner in which many policy wonks (with the notable exception of David John, Mark Iwry, Bill Gale and a few others) and advisors within the DC plan community continue to view annuities. There is still a prevailing view of annuities as being simple “straight life” annuities, a view which ignores the recent development of innovative products in the individual, “non qualified” annuity marketplace.
The first study is a troubling example of this stodgy way of thinking. It is the recently issued GAO report, written for George Miller, Chair of the House of Representative’s Committee on Education and Labor, called “Alternative Approaches Could Address Risks Faced By Workers But Pose Trade-Offs.” It is, by all accounts, a very thorough and well done analysis of what the authors view as the current alternatives to “decumulation” from DC plans. It ignores, however, the an entire range of “living benefits” and other sorts of guarantees which have been successfully used in the “non-qualified” marketplace. It is these sorts of guarantees which can address many of the fears of plan fiduciaries and plan participants that the purchase of an annuity is merely a bad bet made against the insurance company (see an earlier post discussing these fears).
I encourage you to look through the GAO report, and then compare it to the second study. Kelly Pechter wrote a recent article in his Retirement Income Journal of a study published in the Journal of Financial Planning by Gaobo Pang and Mark Warshawsky entitled “Comparing Strategies for Retirement Wealth Management: Mutual Funds and Annuities.” These two economists analyzed 6 alternative models for for guaranteeing income out of a qualified plans, focusing on 401(k) plan accounts and IRAs. 3 of their models addressed innovative marketplace methods: the use of one of the “living benefits”-Guaranteed Minimum Withdrawal Benefits (GMWB)- as well as variable annuitization and gradual annuitization. This study does not provide all the answers, as there continues to be a number of technical/legal issues which need to be settled to make these things really work well in qualified plans (see another, earlier post discussing these issues, referencing the CCH and BNA papers). But it finally opens the door to the sorts of discussions we need to be having in order to make DC annuities work.