The fourth largest retirement plan recordkeeper in the U.S. has begun offering an in-plan group variable annuity option that allows defined contribution plan participants to add a guaranteed lifetime withdrawal benefit (GLWB) option to their target-date fund assets.
Great West Retirement Services, a unit of Power Corporation of Canada, announced the option, called SecureFoundation, last February and began accepting assets on April 1, according to Sara Richman, FSA, a vice president of product development at the Denver area company.
“We’re doing presentations to companies that have recordkeeping relationships with us. One sponsor has taken it already and we have a list of companies that will be adding it in the coming months,” Richman said. She declined to name specific clients.
“They’ve embraced what we’re doing. They understand the value of the income protection,” she added. “They’re saying, ‘This is exactly what we need and we’re going forward with it.’ Others are still asking questions like, ‘How do I know if this is priced right?’ ‘How do I know if you’ll be around in 30 years?’ ‘Is it the right product for us?’”
As of the end of 2009, Great-West Retirement Services’ FASCore recordkeeping division served 23,000 defined contribution in the corporate, government, healthcare/non-profit and institutional markets, representing 4.2 million participants with $123 billion in assets, according to the company.
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SecureFoundation is just one part of Reality Investing Lifetime Solutions program, Richman said. It offers different levels of guidance for different participants—those who want someone to manage their accounts for them, who want help with their accounts, or who intend to manage their accounts on their own.
Like Prudential’s IncomeFlex
Because target date funds and in-plan GLWBs are a qualified default investment alternative under the Pension Protection Act of 2006, participants in plans that offer auto-enrollment can now be defaulted into programs like SecureFoundation and passively ride such a product for the rest of their lives. If participants change jobs, they can maintain the same investment and benefit in a rollover IRA.
“What we’re really trying to do with our SecureFoundation retirement income product is put back in play some of the attributes of a defined benefit plan into the defined contribution market,” said Great-West Retirement Services president Charles P. Nelson in a published interview. “We’re defining that up front, leveraging the portability functionality that has been developed in the defined contribution market through self-directed brokerage-type options.”
SecureFoundation resembles Prudential Financial’s IncomeFlex program, an in-plan GLWB that was introduced in 2007. Both options allow participants to add a certain level of protection against investment risk, timing risk and longevity risk in retirement. Both are potential game-changers in the employer-sponsored retirement plan industry.
“SecureFoundation is similar to IncomeFlex or Nationwide’s SALB (stand alone living benefit), in the sense that they are all income guarantees applied on traditional investment vehicles. SecureFoundation is more similar to IncomeFlex, because both are engineered to DC accounts. Nationwide’s SALB is for a brokerage managed account program.”
| Maxim Target Date Fund Starting Asset Allocations | ||
|---|---|---|
| Maxim SecureFoundation Lifetime Portfolio | Equity Fund Allocation | Fixed Income Fund Allocation |
| 2015 Portfolio | 50-70% | 30-50% |
| 2025 Portfolio | 60-80% | 20-40% |
| 2035 Portfolio | 70-95% | 5-30% |
| 2045 Portfolio | 75-95% | 5-25% |
| 2055 Portfolio | 75-98% | 2-25% |
As of the end of 2009, Prudential’s IncomeFlex product was offered in 170 retirement plans, where 5,000 participants were using it and had invested $261.5 million.
The “all-in” cost of SecureFoundation is 160 basis points per year, including 90 bps for the insurance rider and 70 bps for the eligible funds, which include five Maxim SecureFoundation target date funds (2015, 2025, 2035, 2045 and 2055) or Balanced Portfolio.
Typically, the contract owner would begin paying the 90 bps for the rider at a “trigger date” ten years before their target retirement date. Unless they decided to turn it off, they would continue paying it for the rest of their lives. Under the current contract, Great West could increase the annual rider fee to a maximum of 150 bps.
Glide-paths by Ibbotson
GW Capital Management LLC, a Great West unit doing business as Maxim Capital Management, manages the funds. The “glide-paths” for the target date funds were created by Ibbotson Associates, a unit of Morningstar, Inc. Putnam Investments, which Power Corporation purchased in 2007, is not involved.
Like all GLWBs, SecureFoundation guarantees, in effect, that if the contract owner’s account goes to zero during his or her life-either because of market depreciation, permitted distributions and/or fee attrition-the contract owner will still receive a specific percentage of the protected benefit base (the initial premium or higher) every year until he or she dies.
In theory, a 65-year-old could obtain somewhat similar protection by purchasing an advanced life deferred annuity (also known as longevity insurance) that would provide life-contingent income at, say, age 83. But that would require the kind of irrevocable, lump sum payment that most consumers resist. GLWBs offer longevity insurance on the installment plan.
“It’s a very intriguing approach,” said Joe Bellersen, president of Qualified Annuity Services, a group annuity specialist. “The fact that you’re paying for the tail coverage out of the returns is a convenient way to overcome the resistance to paying for longevity insurance. You’re essential paying for it in installments and paying for it out of the return. I can see that as an appealing approach to someone getting ready to retire from a plan.”
This type of option has been extremely popular as an individual variable annuity rider, with almost all recent purchasers of variable annuities electing it. Prudential and Great West are the first to offer it to the $3.34 trillion private defined contribution plan market. Under the Pension Protection Act of 2006, both target date funds and GLWB riders on target date funds are blessed as QDIAs—qualified default investment alternatives.
Retirement plan consultant and ERISA attorney Fred Reish of Los Angeles is familiar with the in-plan GLWB concept and believes that it will become more prevalent. “I think it has legs. This product has a lot of appeal from a 401(k) perspective. Ultimately the marketplace will decide who the winners and losers will be. But there’s a clear-cut need for guaranteed income, particularly among people will end up with account balances of $200,000 to $500,000,” he said.
“The fact that the premiums [in SecureFoundation] begin at age 55 is very good, since that’s when people will have larger account balances and the guarantee will be worth the most,” he added. “I like the idea that the protection is built-in, but that people also have the freedom to get out if they want to. I like the institutional pricing. This costs 1.5% or 1.75%, while even a reasonably priced retail product might cost 2.5% or 3%. There are just a lot of advantages to an in-plan solution.”
Sleep-easy blanket
By all accounts, annuity manufacturers don’t tout the rider as a source of guaranteed income, but rather as a layer of sleep-easy investment insurance that enables retirees to tolerate a relatively high level of equity exposure in retirement, knowing that, if the market slumps, they’ll get a minimum payout per year. The rider doesn’t guarantee the account balance or the investment performance, only the “benefit base.”
In a roundtable discussion sponsored by Great West, Ibbotson president Peng Chen commented on the difference between the Maxim target date funds in Secure Foundation and the funds Great West offers without a GLWB.
“We made a couple of tweaks compared with the standard Maxim Lifetime Asset Allocation Series offered by Great-West,” he said. “Unlike the typical glide path that assumes you’ll continue to de-risk as you get into retirement, this actually stays relatively flat because, since you have this protection, to some degree, you can afford to invest a little bit more aggressively and enjoy the long-term upside of the equity market.”
“The second thing we did was look at the underlying investment options inside the fund, and we worked with Great-West to implement this asset-allocation glide path using index-type products, which significantly reduced the cost of that protection,” Chen added.
| Age Bands and Payout Rates under SecureFoundation | |
|---|---|
| Single Coverage | Joint Coverage (Based on age of younger spouse) |
| 4.0% for life at ages 55-64 | 3.25% for life at ages 55-64 |
| 5.0% for life at ages 65-69 | 4.25% for life at ages 65-69 |
| 6.0% for life at ages 70-79 | 5.25% for life at ages 70-79 |
| 7.0% for life at ages 80+ | 6.25% for life at ages 80+ |
The rate at which contract owners can withdraw each year depends on their age, and in this respect SecureFoundation adds an interesting twist to traditional GLWB designs. People who take income at 55, 65, 70 or 80 and receive 4%, 5% 6%, or 7% of their benefit base, respectively, aren’t necessarily locked into that percentage for life. (For joint coverage based on the age of the younger spouse, the withdrawal rates are 75 basis points lower for each age band.)
For instance, a person might retire at age 65 and begin taking the guaranteed 5% of the benefit base per year. When that person reaches age 70, he or she could opt to change the payout rate to 6% of the current account value. This would make sense only if the new payment turned out to be higher, which would depend on how far the account value had dropped from the benefit base as a result of market performance, distributions and fees.
Although the potential market for an in-plan income option like qualified retirement plan market is huge, some have wondered whether sales might be limited by the insurers’ underwriting capacity. Ibbotson’s Chen believes, however, that if demand is great enough for in-plan GLWBs, insurers will create capacity.
“There’s no question that these guarantees require insurance companies to manage their balance sheets effectively,” he said. “I think if you take a static view, then, you can figure out how much ‘capacity’ there is. And if you calculate the potential amount of dollars that might come under the guarantee, then there is potentially a capacity issue. Right now, there isn’t really an issue-at least not a big issue). You may have a few firms pulling back from offering VA guarantees, but there is plenty of supply right now.
“The financial market is also quite dynamic, and there are many ways that a company can manage that “capacity” issue, i.e., expand it,” he added. “For example, there are discussions about rolling out “longevity swaps” to help securitize longevity risk in the market. Another point is that, if the demand does come, I would expect more capacity to be created.”
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