The Contingent Deferred Annuity (“CDA”) is a step forward in efforts to creatively meet the income needs of retirees. In the February 2020 issue of Bob Veres’ popular Inside Information newsletter, Bob calls it “One of the most interesting solutions to the SECURE Act requirement that qualified plans offer income guarantee options.” These guarantee options, of course, are subject to the claims paying ability of the insurers who will offer them.
Veres quotes RetireOne Founder David Stone, who says, “The whole goal is making it easy for advisors to integrate these solutions…” Because these solutions haven’t been easy to integrate in the past.
Risk, Transferred
The 30-year trend away from defined benefit (pension) plans has shifted the burden of longevity risk to individuals. Retirees need to be able to pay themselves in retirement since they are typically no longer able to rely on pensions for that income. Aside from Social Security, and possibly the lottery (if you’re very lucky), the only way an investor can secure a stream of income that they cannot outlive, guaranteed, is to purchase an annuity from an insurance company. The problem is that many RIAs don’t like them.
To avoid a possible retirement income crisis, lawmakers, it seems, understand the need to raise awareness among Americans about how retirement savings may be converted into streams of income they cannot outlive. To that end, changes introduced by the House and Senate via the recently signed SECURE Act include provisions that will a.) raise awareness about how accumulated assets may translate into income streams, and b.) make it easier to include annuities in defined contribution plans to assist with decumulation.
Retirement Income Awareness
The likely upshot, as Bob sees it, is “that virtually every retirement plan participant will at least be aware of the chance to turn their assets into income,” as an alternative to the traditional recommendation to roll those assets into an IRA. That could put a lot of pressure on RIAs who’ve avoided annuities to begin working with companies like RetireOne who can help either design valuable solutions or locate existing solutions for their clients.
For example, the CDA—a deconstructed income wrapper like the one(s) formerly developed by RetireOne—may help overcome some of the traditional RIA objections to annuities and solve the annuity puzzle for their clients. Milliman Executive Michelle Richter predicts that as annuities evolve, like the CDA, efficiencies will be found by reducing them to their component parts. Think of risk pooling and tax deferral as other a la carte offerings.
Insurance companies understand that they need to meet the standards of folks who’ve been inclined to ignore annuities in the past. “Bigger picture, the insurance industry is considering a shift from a product-oriented approach to a solution-based approach,” says Richter. The SECURE Act, the first major retirement legislation in half a generation, could drive a lot of innovation.
Advisors Need Answers
The pressure will come from a more educated populace. “Clients are hearing about guaranteed income on their 401(k) balances,” Stone adds. Veres believes that this means “Advisors are going to need to have answers about the best annuity options on the marketplace.” And companies will need to innovate to overcome advisor objections, solve client needs, and meet growing demand.
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