John Carroll, SVP, Member Relations and Sales for LIMRA and LOMA, and Bryan Hodgens, Corporate Vice President, Distribution and Annuities for LIMRA and LOMA, discuss how in-plan annuities are gaining momentum in the industry. Read the transcript.
Transcript
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Welcome to Insider Insights, where we dive into hot topics facing the financial services industry. Today we're excited to have with us John Carroll, Head of Life and Annuity at LIMRA and Bryan Hodgens, Head of Research also at LIMRA. Join us as they share their expert insights about how in-plan annuities are gaining momentum in the industry.
Hey, Bryan, how are you doing?
John. How's it going?
It's going well. It's going well. It's good to talk to you again. We don't do this enough.
I know. And I understand we're going to talk about in-plan annuities or I think that's the world of the retirement plans space.
Yeah, you and I talk about annuities all the time, and usually we're talking about sales and how insane they are. But I think this is the other big topic right in the industry is in-plan annuities or as we'll discuss, maybe it's something else, but I think that it's a big topic. We see a lot of activity between carriers and asset managers and I think for the sake of people listening, it's probably, let's think about where did this come about? Like all of a sudden, I mean, it seems it seems as though all of a sudden that's all you read about.
I don't think that's really the case. Right. I think it's been around for a while. But what triggered this sudden interest?
Yeah, I know. It's a good question. And you're right. I mean, it's like in the last three months, let's call it, a lot of headlines.
I mean, BlackRock, we saw that. Income America, TIAA, In Power had an announcement a few weeks ago about adding these products into their platform. You know, I think it's been building you know these are bigger headlines of late but this has been building for a while now and I actually I think about it kind of saying you know it's an old idea that's new again it's you know, how did we get here to this point? Well I mean look an annuity, the idea of the annuity inside of a 401(k) plan, a defined contribution plan, it's been around for a long, long time. And, you know, the question could start with, you know, what was the old way?
Why, was it that we've had this for all these years and now why all of a sudden, you know, explosion of new products? And these announcements, I think that, you know, if you summarize the past and I'll say the past is pre-2020 and the SECURE Act became the catalyst for a lot of what we'll talk about here. But prior to that it was, hey annuities were available but there was a reluctance on the plan sponsors' part because they would look at the annuity and acting as a fiduciary. They'd say, well, you know, I'm putting a guaranteed income product potentially into my 401(k) menu for my employees, my plan participants.
And what if the insurance company can't make good on those promises, on those guarantees? I'm held as the fiduciary. I'm held liable. So there was this reluctance there in that regard.
Now, some people did do it and did their due diligence and it's been just fine, but it sort of plateaued really prior to the SECURE act. Here comes the SECURE Act in 2020 and the next thing you know. So what happens there? Well, if there's a safe harbor that's created, you know, a risk, a term there, but, you know, a safe harbor that allows the plan sponsor now along doing these fiduciary responsibility is there's this code, it's called code 404.
But if they follow these guidelines in choosing the insurance company, they now have this safe harbor. So it sort of eliminates that whole thought of previously that I mentioned. I think also what's happened is that that kind of kicked off, you know, this new kind of wave or explosion of new products coming to market. And simultaneously to this, there's been this kind of build up of over the last few years.
The technology's catching up. There's been some advancements made there. And also just education. I mean, this is we could talk more about this, but it's a it's a subtle thing, but it's one of the most important things is really about this idea that, you know, plan advisors, consultants that really drive, you know, the retirement plans with plan sponsors, helping them set them up didn't know annuities really well and they're not comfortable with them.
And I think that's been changing too over the last few years. So I think that's interesting too, because the safe harbor was the big deal. Right? And that's gone.
So now it's, okay, what are the objections now? And I think, because anything you look at with our work, it's very clear participants find the idea very interesting. Right. And they seem to want it in their plan.
So I think, what would it be now that's concerning people, not people, sponsors and/or advisors. Right. What are they like? How are they reacting to like, okay, we've got a safe harbor?
Well, still not sure. What is it that they're not sure about or has that really you know, is it taking away all the concerns that they have? No, there's still concerns there. And I think what I would describe the last few years and where we are currently is we're on this continuum, this I call it just sort of this positive momentum run here where you said challenges, excuses, whatever you might want to call it, but was sort of eliminating some of them.
I think that today plan sponsors are going to we've done in our studies and our research recently here at LIMRA, but they've said, you know, I'm still learning about how the products work. There's not this there's some people will use this phrase, well, you know, is it a one size fits all? You know, does the annuity does everybody and everybody in my company all the employees, the plan participants need an annuity? The answer to that is no, of course not.
But there are questions about that. There's questions around portability and liquidity. Can these be moved from one plan to another? Have those been addressed at this point or is it still open?
For the participant, that's got to be one of the most important things, right? Is that portability, liquidity issue and certainly for the sponsors as well. So it is being addressed and yes, there is portability and liquidity in these products now and but it's continuing to grow and expand. So not all record keepers have these products on their platforms yet.
And when we think about portability, it's like, okay, here's product A and it's on, this record keeper has it available on their platform. A plan participant employee leaves that company and goes now to company B, different record keeper is that product on that new record keeper's platform? If the answer's yes, then yes, there's portability. The technology's there to move it across.
Now, the plan, the record keeper's got to have it over there on that new plan, that different record keeper. That part will only get better over time. Record keepers are adding these products to their platforms. I think the other thing that's interesting, you know, you make me think about sort of this movement of the plans and the money.
Over the years too, there's been more connectivity of all of this, the movement of the plans and the money with middleware companies. So there's companies out there like SS&C and Maturity, and these companies have come along and what they're doing is they're putting the products into their platforms and then the record keeper can go to those middleware companies and not just have to get one product, but they can get a suite of those products available and just connect them into their platform. So it becomes thus the name middleware. It's been a real evolution there as well to try to help kind of overtake overcome some of these objectives that have been around.
That's interesting. I think, you know, you and I have been around for a long time. We saw the rise of the 401(k) and you know how mutual funds, you know, just took over. Then it was the rise of the target date funds.
Right. What you just said was interesting, right? You're creating a technology base to allow for lots of options. But do you see that happening, do we think, you know, we talked earlier right, about is it early, we know it's early innings.
This is really new. Do you see it where there will be lots of choice, but there'll be lots of these products? Or do you think it ends up with a, you know, a handful, kind of like the target date space has become the ETF space has become, because it's, you know, too much choice can be overwhelming.
And not enough choice maybe doesn't make people comfortable. And this is something we've got to get participants certainly comfortable doing. So the portability is great, but it's why you're in the plan. Do you think there will be more and more or do we hit a point at which it's like, okay, there's only so many the market can bear?
That's a great question. You know, I don't have the ultimate crystal ball here. I mean, I've got an opinion. My opinion is that I think there's a lot of room for growth here.
I do believe that there's going to be more products that come to market. I think the market is... think about the market, John. It's over $10 trillion, right? The defined contribution market.
You know, when you think down into the plans, there's a little over 700,000 401(k) plans out there in the marketplace in the U.S. Most plans are small plans. I think sometimes people think, gosh, there's just a bunch of plans that are the size of Microsoft, but in reality there's not. Most of America, as we know, is built on small businesses.
So there's a lot of businesses there, and there's a lot of opportunity for more products to come into the market. However, I think, you know, what you're going to see over time is... we're seeing it right now. Right? So look at those headlines we mentioned at the beginning of this conversation, you know, with BlackRock.
And I said Income America has got an interesting product, great product that's been out there, lots of them that are out there. What they're doing is there's lots of different designs, right? There's products that are standalone, where the annuity becomes just another investment option inside the menu, investment menu, there are designs where the products are getting embedded inside of a target date fund. That's the Income America product, as an example.
This is... this is a product where partnerships, actually that's another topic we could think about. The partners came together. American Century is the target date firm provider; Nationwide and Lincoln got together for the annuity and they've embedded that annuity product inside the target date slate and inside that fixed income sleeve of that product.
Right. So that's a that's a strategy that that you see in product design. There's then products where the target date fund is the funding vehicle. You're accumulating your assets in there.
But then at some point somewhere in your 50s or 60s, early 60s, you're going to see the opportunity for the plan participant to move the money out of the target date, into an annuity outside of the plan, there's some of those strategies. So to answer your question, I think there's... is it saturated? I don't think so, not yet because there's lots of different designs. There's a lot of different options available.
I think they're going to be key players, like in everything else, there will be bigger players that will emerge over time. It is interesting that what we've seen since the SECURE Act, there's been a lot of partnerships too, and a lot of companies coming together to build products. We don't typically see that and that's kind of unique and a little bit different. I think that's pretty cool.
So I mean, again, there's a lot of moving parts. Let's think about it from a participant perspective. This is something you and I have talked about. I think it's really interesting is the is part of the way this may be becomes more attractive is shifting the mindset.
We talk about in-plan annuities, everything about in-plan annuities. Well to the average person, what do they know right. What does that mean? But you know, you've talked about saying, should this be really more about it's a guaranteed income feature or option inside the plan?
To me, that seems like something people say, yeah, I want that. Now how it works, you know, most people don't care what's under the hood, right? But that just seems to me to be much more attractive to a to a participant and maybe helps move this thing along. So, you know, what your thoughts about that.
It is a bit of a nomenclature that's kind of just landed. However, it's landed, where we're kind of putting everything into this bucket or this phrase of it's an in-plan annuity. You know, we probably should be saying, here's the long version of that. A guaranteed income product in a defined contribution plan... which one do you like better?
Right? So that's a that's a long mouthful. But the reality is that's what it is. It's just we're looking down the industry saying, hey, look, there's an opportunity to put guaranteed income products inside the retirement plan in the workplace.
Some of them are going to have a design in-plan truly, as I describe with that earlier, with the target date, the embeddedness of that product there, some of them are going to be out of plan where, I didn't mention it, but like for example, Fidelity has built a great option where they have an exchange, they call it their insurance exchange, and at starting at the age of 55, you know, have you've been accumulating your assets in your 401(k) plan at work, Fidelity's as your record keeper. You get an opportunity to start to move money out of that plan into their insurance exchange. You, the participant, get to choose how much you want to move over and then they've gone ahead and done the due diligence and built out a platform of SPIAS and DIAS (deferred income annuities).
And just, you know, you get to choose from which one you want. They're pretty simple, really easy. And it's but yet it's out of the plan, right? So there's a lot of different options there.
So, you know, I think that the plan participant, you know, I think about it like this the employee we've been serving, the industry has been serving them for years. They will say, you know, look, I like the idea of a guaranteed income product in my at work, in my retirement plan. Why? You know, I mean, look, we wouldn't be having this conversation right now if the defined benefit, the old pension plans, are still around in the private sector, but they're not.
That's the reality. They've been coming down and going away for years. So I think employees, Americans are looking and saying, I like the concept of the guaranteed income. I like the idea of it being in my in my 401(k) plan.
But the reality is, is, okay, we can get it over there. We're doing a better job where the plan sponsors are giving us opportunities to present it to them. Advisors and consultants now are getting educated through, you know, over the last few years, more so on how these annuities work. And we're starting to see real movement.
But I think the idea that we were there, you know, we got a little bit of work still to do, for sure. So we talked about the participants and we really get to advisors that might be for another day, right? But that the it seems to me, you know, we need this needs time, right? It's new, not new, but it's come back.
It definitely needs time and we need to get sponsor... there's a lot of parties... there's sponsors, there's carriers, there's advisors, and then there's ultimately the participant for whom this is built. Right. So, you know, let's see what we can end there. I think, you know, just talking about from a participant perspective, like what's it going to take?
What kind of education, what does the industry have to do? Because it sounds as though the dominoes are set up. We've got the regulatory issue taken care of. The technology is there.
Right? You've got all these pieces in place. Liquidity has been addressed. Portability now it's on us as an industry.
What do we have to do? Because again, we have to be in it together for this to really grow, right? Yes. Everybody will get their market share.
But, you know, what do we have to do to get scale that the industry wins as a whole to bring this benefit to...
You know, these millions of people. Yeah, it's going to be a few things. You mentioned, also add to your list plan sponsor advisors, product providers, participants...
You need to add record keepers because they're going to care. They're very proud of that. I forgot about that. And I'll start there and we'll end it here with that question.
But I, I think that education, education is really important. We've got to keep going on that as an industry. Advisors and consultants drive retirement plan business through the plan sponsors. I think we've done a lot of good work there.
There's a lot of good education programs going on out there in the industry. I think that's terrific. We got to keep going there right?
2: I think we've got there's a sort of a new, we got to start to pivot more towards the education going into the actual plans and the participants. There's one thing to be educating advisors and consultants and the plan sponsors. We can't stop there. We've got to go into the participants too.
They tell us they want it, the concept's great, but you got to actually go and you've got to make that continuum of education with them as well. Record keepers play a key role here. I'll go back to that because they've got to put more of these products onto their recordkeeping platforms and we're seeing that. Those are some of those announcements we saw over the last few weeks, few months.
That will continue and that will help a lot, and the record keepers do a good job with helping the advisors and their plan sponsors with education, too. So I think that that's also very good. And I think the product innovation will continue and I don't worry about that as much.
But the plan, what I do think that we can say to the product providers, to the insurance companies, is they've also got to have a piece in this game too, in terms of that education and support to the plan sponsor and to the advisor. One of the things I think we will see in these partnerships is they're partnering with asset management companies and other things, and they may be relying a lot on those other partners to do the education and to promote these products within this ecosystem. I think that the insurance companies can be wholesaling into this channel. Think of it as a channel, defined contribution channel, and they too have to be involved in it in that way too.
So those are all those things that just got to it's a continuum. It's not that we haven't started, but that's what's going to get this to continue to see some of these good adoption numbers. Yeah, I think it's early innings, right? I mean, this is just burst onto the scene, even though it's been sort of there for a long time.
And I think, you know, you and I have a lot to talk about. We always talk about this stuff. So I think we will we will keep the conversation going either here or offline. But thanks for joining us today.
I'm glad we got to do this. I hope it's educational for the folks who are listening, but we will continue the story. Yeah, good to chat. Take care there.
Thank you.
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