A fixed indexed annuity designed exclusively for 401(k) plansArticle added by Shelby Smith on November 28, 2012
ShelbySmith

Shelby Smith

Joined: November 20, 2012

My Company

Dressander|BHC

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Creating a FIA exclusively for 401(k) plans and putting it on an equal footing with traditional options is a major advance for our industry and progressive financial professionals have been delivered a golden opportunity that should be aggressively pursued.

Financial professionals who help prepare employees participating in 401(k) plans for retirement face a challenging task: finding a conservative investment option inside the 401(k) that protects participants from outliving their money.

For years, financial professionals have been advising clients to maximize their contributions to their company’s 401(k) plan and balance their allocation for highest growth within their risk parameters. Now, as retirement looms on the horizon, many 401(k) participants must find ways to direct those funds into more conservative investments that generate income throughout retirement. The reason: Traditional approaches lack full reliability to deliver income for life.

The insurance industry’s fixed indexed annuity (FIA) is an answer to meet the retirement income challenge, but certain obstacles have prevented it from gaining traction as an option within 401(k) plans on an equal footing with traditional investment options like mutual funds.

Thankfully, the barriers to entry have finally been dismantled by a major insurance company’s recent introduction of a FIA exclusively for 401(k) plans. The FIA allows those approaching retirement and the risk averse to complement traditional 401(k) investment choices by offering a lifetime income guarantee to protect them from outliving their hard-earned money.

Some of the concerns faced by the retirement-minded that can be overcome with FIAs include:
    1. If my current contributions and employer matches continue unchanged, what will be the value of my 401(k) on my planned retirement date?

    2. How much guaranteed annual income will I get from my 401(k) money on my planned retirement date?

    3. Is this income guaranteed to last as long as I live, regardless of market or interest rate changes and regardless of how long I live?

    4. If the stock market falls dramatically, as it did in 2000–2002 and 2008–09, will my family’s plan for retirement be affected?
Today’s traditional 401(k) plans have not provided acceptable answers to these important questions, because most 401(k) options available to participating employees are investments that move up or down in value as markets and interest rates change. What’s more, two stock market meltdowns in this millennium, high market volatility and an uncertain global economic landscape continue to highlight the risk of traditional 401(k) investment options. The potentially safer fixed rate options currently available offer meager growth and no inflation protection. What should a 401(k) plan participant do if they want predictability and income protection?

Today’s FIA is the answer for 401(k) plan participants who are approaching retirement or who are risk averse. Here are the reasons:
    1. If contributions and matches continue until the planned retirement date, the roll-up interest rate of a FIA with a guaranteed lifetime income rider makes it possible to know exactly the minimum balance in the annuity’s income account.

    2. Since both the minimum income account balance and the age of the employee are known on the planned retirement date, the minimum amount of guaranteed lifetime income from the annuity is also known.
    3. The guaranteed lifetime income continues until the annuity owner dies, even if the accumulation value goes to zero. In addition, the owner has the flexibility of stopping and re-starting the income at any time or withdrawing all or part of the accumulation balance in a lump sum.

    4. Until income is elected under the guaranteed lifetime income rider, the annual changes in both the accumulation and income values can only be sideways or up, never down, regardless of market or interest rate changes.
To add the FIA to 401(k) plans on a competitive basis, changes to traditional administrative practices of insurers were necessary. First, the administration of the FIA had to be adapted to an electronic record keeping platform that provided employees online access to monitor and manage their account. Maintaining the traditional FIA paper-based reporting would also cause the record keeping fees to exceed those for traditional 401(k) options and make the FIA less attractive for interested employees.

Second, since fees must now be fully disclosed to plan sponsors and participating employees, level commissions to agents/advisors over the life of the FIA were required. Third, the new online administrative platform must accommodate transfers to and from the FIA as well as payroll deductions and employer contributions. The surrender penalties on contributions deducted from payrolls must be based on the date of the initial premium, rather than when the additions were made, so that a single surrender period covers all moneys placed in the FIA option of the 401(k).

The fourth unique feature is the portability of the FIA with the guaranteed lifetime income rider intact when employees change employers. The 401(k) FIA can be re-classified as an IRA without re-starting the surrender period, without loss of the guaranteed lifetime income feature and without agents/advisors losing their level commissions. The portability of the guaranteed income rider upon separation by the employee is not offered by variable annuities that might now be included in the 401(k).

The last major FIA feature is that agents who wish to market the FIA to businesses sponsoring 401(k) plans must be securities licensed or registered. This condition is necessary, since most 401(k) money is now in securities and discussing with plan participants the movement of 401(k) money to a FIA could entail investment advice. Other less significant changes were also necessary.

The FIA exclusively for 401(k) plans is a major innovation that opens to insurance agents/advisors a $3 trillion dollar plus market with 50 million participating employees. All the features and benefits of FIAs that have fostered their acceptance by retirement-minded individuals can now be available to employees participating in their employer sponsored 401(k) plan.

Agents/advisors participating in the FIA/401(k) market will have an open door to help participating employees with their other savings, investing, insurance and financial needs. Creating a FIA exclusively for 401(k) plans and putting it on an equal footing with traditional options is a major advance for our industry and progressive financial professionals have been delivered a golden opportunity that should be aggressively pursued.
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