Insurers expected to cut living benefit offeringsNews added by Benefits Pro on June 25, 2014

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By Chuck Epstein

Low interest rates have hurt efforts to deliver higher rates of return for deferred income annuities, but the problem may get worse as insurers pull back on their lifetime retirement income products.

That’s the big takeaway in a new report from Cerulli that found half of the insurers surveyed were planning to cut the number of product offerings that included living benefits in the next three years. Another 27 percent of insurers said the number of offerings will remain the same.

Low rates, of course, call into question the effectiveness of fixed-income investments as a foundation for an ongoing income stream, Cerulli researchers said. But low interest rates also pressure insurance firms’ ability to profitably invest their general account assets, the report said.

The report said developers of guarantee income products also must address investor complacency – an especially alarming point given that today’s retirees may outlive their savings due to a combination of low levels of savings, longer life expectancies and rising costs of living.

This is because most investors, the report said, “will not preplan for retirement and any solutions must be made available when these investors are ready to make decisions and review options. Products should be designed with this scenario in mind.”

This means insurers, such as Northwestern Mutual and New York Life, which sell the most DIAs, will want to offer more design flexibility, Cerulli said. These features could include ones which allow investors to decide when they take income, choose lump sum distributions, or choose an escalating payment to hedge against inflation.

These products could also receive more regulatory approval as policymakers become more concerned about individuals outliving their retirement assets. DIAs offer some flexibility against the problem, which has caused policymakers to consider them as viable annuitized products. The guarantee income feature could also have a role in DC plans by mandating that a portion of assets be directed towards a DIA-type product as a qualified default investment alternative, Cerulli said.

In order for these products to gain traction among participants, Cerulli suggested that they be simple to explain and readily available when participants need them.

Yet despite their apparent benefits, participants have not been buying DIA products inside of DC plans. Only about 25 percent to 50 percent of all DC plans are offering these guaranteed income products, while only 10 percent of participants have actually purchased them, Cerulli estimates. Among the reasons for the low adoption rate is employer conservatism and a lack of education among participants about what DIA products can deliver.

Another factor is the slow introduction of DIA-type products is the fear the plan sponsors would have to change their lineup of investment options, accompanied by fears of a fiduciary-related lawsuit. “Fiduciary fears exist as an overhang of the DC market, even for those employers who have a holistic approach to employee benefits,” the report said.

That explains why only 20 percent of employers plan to introduce or now offer DIA products.

Cerulli said these are plans which have “a defined benefit legacy and a culture of caring for their employees,” while plan sponsors which advocate a rollover upon retirement will not be interested in offering a DIA-type product to their workers.

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