Annuity Sales Can Increase. Sam Friedman from Deloitte Center Explains How

Thousands of baby boomers are turning 65 every day, and company pension plans are more and more a thing of the past. Conditions should be ripe for a thriving annuity market. However, annuity sales were 11% lower last year, according to the LIMRA Secure Retirement Institute. Research leader Sam Friedman from the Deloitte Center discusses the situation and how it might change based on information gathered from a recent Deloitte survey.

Sam Friedman

Sam Friedman

Friedman notes that current low interest rates are part of a macroeconomic challenge and that interest rates will eventually go up. But there are other factors that insurance companies must face if they want to broaden their market base and keep sales moving forward.

In studying the situation, Deloitte looked at 1,500 individuals through an online survey, half of whom were annuity buyers. The non-buyers were further broken into those who had never considered annuities and those who had thought about it but didn’t buy. According to Friedman, the survey results suggested ways for insurance companies to “rethink and maybe reinvent the annuities market.”

One option is to focus on current annuity buyers. The survey found that four out of ten people who had bought an annuity had bought a second one. And for three out of four of this group, the newest purchase was an additional annuity, not a replacement one. This underscores the importance of the existing client base as a source for resales.

The survey also looked at increasing the size of the market base, “growing the pie.” In order to achieve this, Friedman says, the survey looked at three possibilities. One was repurposing the products—looking at some uses for an annuity besides retirement in order to reach a younger prospect base. Another suggestion was for the insurance industry to be proactive in providing information about annuities so as to cope with widespread lack of understanding of how annuities work, even among people who own annuities.

Another suggestion, Friedman says, was to “leverage the workplace channel.” Recent changes in IRS rules will help to facilitate the use of annuities in defined contribution plans. It should be easier for annuity companies to reach consumers through the workplace approach. For one thing, the IRS has made it easier to include an annuity as a distribution option in defined contribution plans. The IRS has also “set the stage for the sale of deferred compensation annuities.” Another change has been for companies to transfer their defined benefit plans to annuity companies.

Another thing that can help to boost the sale of annuities is to give individuals the option of partially annuitizing retirement funds. Most companies have an “all or nothing” approach to dealing with a retirement fund. Friedman says that some people are concerned about putting all their eggs in one basket. The survey found that people were more comfortable if they had the option of holding back some funds for other investments. And, in fact, having an option like that made people more likely to annuitize the entire amount in their retirement funds.

Summarizing, Friedman says that the most likely annuity buyer right now is someone who already has an annuity. However, if companies can reach out to and develop a younger market, they are much more likely to have annuity buyers down the road. “Starter” annuities would be a good idea.

Sam Friedman is the Insurance research leader at the Deloitte Center for Financial Services, putting his journalistic skills and three decades of industry experience to good use analyzing the latest trends and identifying the major challenges confronting the property-casualty and life insurance industries. He joined Deloitte in October 2010 after 29 years at National Underwriter P&C, where he served as editor-in chief. Retirement News Today is a featured network of the Sequence Media Group.

High Fees and Lack of Transparency Are Generating 401(k) Litigation. Expert Grant Easterbrook Explains

Employees who have encountered high 401(k) fees have fought back with lawsuits, and the courts have begun to side with them. One of those involved in this litigation is Grant Easterbrook of Dream Forward Financial. Easterbrook discusses the litigation in this report.

Easterbrook is involved in two lawsuits at the moment. The more important of the two is Tibble v. Edison International, which was argued before the Supreme Court in February, 2015. The decision should be handed down by the end of June. Regardless of the outcome, Easterbrook says, the case will “cause awareness of legal liability to skyrocket.” It’s important for employees to be aware of their choices and for employers to select a plan with low costs and with the best interests of employees in mind.

Grant Easterbrook

Grant Easterbrook

Employees are not always aware of the fees associated with their 401(k) plans, but the fees can add up. Fees include things like maintenance fees and commissions. But there are also hidden opportunity costs, as Easterbrook characterizes them, and all of them together can have a serious negative impact on an employee’s retirement fund. Employees are forced to use a proprietary fund from which the administrator gets a cut. The amounts involved over a period of ten to thirty years can be huge.

Some employees who change jobs will choose to leave their funds in the 401(k) provided by the employer they have left. This may not be a good idea. Easterbrook says if he were looking at an employee’s situation to provide advice, an important consideration would be the amount of employer match. In a high-fee fund, the employer’s match may effectively offset the high cost of the plan. However, if the employee leaves and loses that match, the fund should be rolled over.

According the rules affecting these plans, an employer should be acting in the best interests of the employees and not, for example, just giving the funds to his brother to administer. The point of the lawsuits that have been filed, Easterbrook says, is that some employers have not been doing what they should do but have instead put their employees’ money in high-fee funds. Easterbrook does not have, as he says, “a crystal ball” to predict what the Supreme Court with do in the Tibble case. However, any outcome will probably make employers more aware of the need to examine low cost, high quality funds for their employees.

Transparency is a problem, as fund administrators probably don’t want to share bad news with employees. Easterbrook recommends that employees should look closely at the fund choices in the plan. Employees should be looking for low cost options. It is also helpful to ask someone in a company’s human resources department what kinds of fees are being charged—maintenance fees, commissions, hidden fees associated with frequent trading, and the like. Easterbrook recommends that employees not take out loans against their plans or making early withdrawals. One reason that retirement doesn’t work as well as it might is leakage from funds.

Easterbrook suggests that an employee who leaves a company should roll the 401(k) into something else, such as a self-directed IRA. The average employee will have perhaps eleven jobs during the work years. It’s best to consolidate all retirement funds into one account.

Grant Easterbrook is a co-founder of Dream Forward Financial, New York, NY. Dream Forward offers a low-cost 401(k) plan with a modern website, total transparency, top investment choices, no hidden fees, and no conflicts of interest. The company also gives employees guidance on all goals, not just retirement. Before working with Dream Forward, Easterbrook was an analyst for Corporate Insight in NYC.