The largest retirement plan provider in the U.S. and the fourth largest asset manager in the world recently announced that they will incorporate annuities into their retirement offerings. Fidelity will allow some plan participants to convert savings into guaranteed investment products, while State Street Global Advisors will embed such products into some of its target date funds (TDFs). CNBC reports that BlackRock offers annuities in its TDFs. Income America, Nationwide and Lincoln Financial have also come to market with guaranteed income solutions.
Is this the wave of the future? It certainly could be.
It Makes Sense
For asset managers, financial advisors, plan providers and those helping workers invest, incorporating annuities into retirement plans makes sense. The number of Americans in retirement is growing, but not all are confident they have saved enough to ensure sufficient lifetime income. In a 2022 poll, The Motley Fool found that just 45% of Americans aged 45 to 59 and only 52% of those 60 and over felt financially prepared for retirement.
Not having enough savings is a real concern for many in retirement. The stress of worrying about money running out can quickly tarnish the so-called golden years. Enter annuities. Annuities can be a tax-efficient way to guarantee a steady lifetime income stream.
The attractiveness of guaranteed income products in retirement funds—whether through TDFs or not—is underscored by recent findings.
- More than 50% of retirement plan participants invest in TDFs, and more than 75% of plan providers offer at least one TDF option.
- LIMRA, a leading insurance industry association found that sales of annuities reached record highs in 2022.
- A Q3 2022 survey by Cerulli found that 68% of defined contribution plan consultants were most likely to recommend those TDFs with a guaranteed income component, which was higher than any other retirement income solution surveyed.
But Are You Ready?
The benefits and the level of interest in using guaranteed income products in retirement plans are clear. But product providers, recordkeepers and plan sponsors must prepare to support the large volumes, varying structures and participant experience needs that are inherent in such products. Whether through TDFs or otherwise incorporated into retirement plans, deciding to add guaranteed income products is only the first step.
Servicing the annuity within a retirement plan—pricing, valuing, providing portability for participants switching plans and incorporating product characteristics into financial modeling tools—is a challenging undertaking. It requires data connectivity among multiple entities, complex guarantee calculations, and tracking and accounting for underlying guaranteed benefits. Some recordkeepers currently only support investment into their own firm’s annuities, while other recordkeepers cannot service any annuity-based solutions on their platforms.
Middleware As the Solution
The good news is that technological advances in recordkeeping and valuation have removed the once-challenging servicing burdens. Middleware—technology sitting between recordkeepers and product providers—supports simple and effective connectivity between guaranteed income product providers and recordkeepers. It is a recordkeeper-agnostic solution for data connections, servicing, oversight, guarantee calculations and distribution. Middleware can also be used to service any type of guaranteed retirement income product, regardless of the annuity’s structure or whether the solution is held in or out of the plan. Whether a participant wishes to change plans, a plan changes recordkeepers, or the product is dropped, middleware can help accurately and appropriately account for the guaranteed benefits.
The widespread acceptance and use of TDFs and the clear demand for guaranteed income solutions have created a real opportunity for product providers, recordkeepers and plan sponsors to help millions of Americans ensure financial security. And with middleware technology that simplifies all servicing aspects, the retirement industry will be able to meet this new standard in retirement preparedness.
To learn more about guaranteed income products and middleware solutions, download SS&C Retirement's "Retirement Plans: Guaranteed Income Means Better Outcomes" whitepaper.
Written by Wai Chan
Product Manager-Retirement Solutions