Having enough to make it through is today’s singular planning challenge
by Eric Stevenson
Mr. Stevenson is president of Nationwide Retirement Plans. Visit www.nationwide.com
Investment behaviors have been changed by the pandemic, and this will persist in the post-COVID-19 world. In 2020, Americans’ confidence in their ability to achieve a secure retirement was shaken when the stock market plummeted from record highs to its steepest decline since Black Monday. Ongoing volatility has kept investors on edge even after the rebound. In fact, the vast majority say the pandemic has made them realize they can do everything right—and still be blindsided by forces beyond their control.
According to a recent Nationwide Retirement Institute survey, roughly two in five Americans say the COVID-19 pandemic has impacted their plans for retirement, with many feeling they will be forced to retire before they’re ready or later than planned, and some feeling like they won’t be able to retire at all.
This is happening at a time when defined benefit pension plans are available to fewer Americans, the future of Social Security and Medicare remain uncertain, costs associated with living in retirement are going up and people are living longer. For people hoping for a secure retirement, it all adds up to a perfect storm. As Americans try to chart their course through this storm, they’re looking for new ways to ensure their retirement plan won’t be derailed.
Turbulence & Volatility Prevail
Selecting the best investment portfolio to meet retirement goals can be a daunting task. Turbulent equity markets and high levels of volatility have made investing in the equity markets more challenging. Historically low interest rates have made the outlook for fixed income investments less attractive. Investors are faced with the difficult decision on where best to invest their savings in ways to limit risk and improve expected returns.
There’s good news in the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), which provides more access to retirement planning solutions and has removed some obstacles to innovation, positioning our industry to make a real difference for those seeking additional options.
One of the most meaningful opportunities created by the SECURE Act allows for greater adoption of annuities within defined contribution plans by eliminating traditional barriers like portability and insurer selection. This is a transformative change for Americans seeking to protect their savings and convert it to guaranteed income in retirement. In-plan annuities have the potential to not only lock in retirement income, but to also reduce equity market risk and offer growth potential within solutions that are liquid.
A Need To Transform Savings Into Guaranteed Lifetime Income
Unlike previous generations, most Americans today do not have a guaranteed source for retirement income beyond Social Security—and many recognize this is not enough. Millions of American savers have focused on accumulating a significant nest egg, with no clear plan for turning it into income when they retire.
As the recent crisis causes Americans to come to grips with a turbulent market, a sluggish economy, rising uncertainty and historically low interest rates — with millions facing the prospect of a retirement that could last 30 years or more – there’s growing interest in understanding how to convert retirement savings into a stream of income that won’t be exhausted should a retiree be fortunate enough to live longer than expected. For many, in-plan annuities may be the answer.
The industry is ready for this type of solution. Financial professionals, investors and plan sponsors are starting to appreciate the income certainty and access an in-plan annuity could provide. A recent Nationwide Advisor Authority study found that nearly two-thirds of advisors and financial professionals say they are likely to promote the adoption of in-plan annuities to provide guaranteed income within their clients’ defined contribution plans.
Investors are interested as well. Traditionally, annuities have been available through the guidance of a financial professional, but not all consumers have access to this professional help when it comes to considering annuities as an investment option. The opportunity to offer annuities through a retirement plan will increase access and availability for the nearly two-thirds of both Millennial and Gen X investors who indicated in our study that they are likely to incorporate in-plan annuities within their defined contribution plans.
Additional research from Greenwald Associates found that 64% of plan sponsors believe employees should be offered in-plan options for a regular income stream in retirement and two in five are highly interested in offering a guaranteed lifetime income annuity in-plan or already do.
Growing Interest in Protection and Certainty
With concerns about another bear market still running high, there is growing interest in downside protection. In the darkest months of 2020, we heard from thousands of Nationwide Retirement Plan participants who felt helpless as they watched the market crash pummel their savings. During this time we saw our call center volume double, with a majority looking for someone to talk to, listen to their concerns and help guide them on the right path. Many are starting to realize that an in-plan annuity could have helped to protect their investments—and they could have rested easier.
Nationwide’s Advisor Authority study revealed that investors’ number one financial concern was losses in their portfolio related to COVID-19, which was followed closely by protecting their assets and managing volatility.
In response to trends and consumers’ needs, the industry has been evolving and many new products have been introduced that are simple, transparent and can provide greater value. There are encouraging signs that Americans may be open to the adoption of in-plan asset protection solutions — especially younger investors.
A recent white paper published by Wilshire Associates discussed the benefits of an in-plan fixed indexed annuity and determined that some Americans may benefit from investments that provide principal protection and the opportunity to participate in market gains.
Barriers Removed: A Call to Action for our Industry
Although the SECURE Act could not have come at a better time and was widely anticipated by the industry in 2020, it was quickly sidelined by COVID-19 and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Nevertheless, the SECURE Act provisions are slowly being enacted and will make it easier for plan sponsors to offer in-plan annuities and lifetime income solutions to their plan participants.
Plan sponsors have been reluctant to offer such products in the past due to the lack of portability, liquidity, growth and ease of use. The SECURE Act provisions and new product design possibilities eliminate many of these barriers by allowing investors to take this investment with them via a rollover into a future employer’s qualified plan or an IRA, liquidate assets, and capitalize on market upside. Plan sponsors can also position some of these products as a Qualified Default Investment Alternative (QDIA). The SECURE Act provides a safe harbor for plan sponsors concerned about fiduciary responsibility in regard to the selection of an annuity provider, thereby addressing another traditional barrier to adoption by plan sponsors. It is important to keep in mind that many new products are coming to market, and they will all have different structures and designs. Plan sponsors will have to decide which options are most appropriate for their plans.
The important lessons learned from 2020’s perfect storm serve as a call to action for those of us who are in a position to develop new solutions to empower plan sponsors and their plan participants with the tools they’re asking for. We need to proactively innovate to help investors accumulate savings, protect their investments and convert them into an income stream they won’t outlive. America needs our industry to accelerate in-plan annuity development along with other income and asset protection solutions for retirement plan participants.
1 May 2020 by The Harris Poll on behalf of The Nationwide Retirement Institute® among U.S. adults 18+.
2 Nationwide’s sixth annual Advisor Authority Study, 2020 was conducted online within the United States by The Harris Poll on behalf of Nationwide from May 27 – June 25, 2020 among 1,768 financial advisors and 817 investors, ages 18+.
3 Greenwald & Associates Retiree Insights 2020 Survey of Plan Sponsors
4 Wilshire Associates: Understanding Fixed‐Indexed Annuities (FIA) and Their Potential Role in Asset Allocation Portfolios, November | 2020
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