A Q&A with Scott Colangelo, chairman and managing partner of Prime Capital Investment Advisors and the creator of Qualified Plan Advisors. 

 

How do you define “guaranteed income” within 401k plans?

There are two options: in-plan and out-of-plan guaranteed income. The in-plan solutions mean the guarantee is there as long as the money stays in the plan. The out-of-plan solutions allow an individual who has retired to move a certain amount to an annuity outside the plan to get a guarantee. I’m not particularly a fan of the out-of-plan solutions because they’re essentially repackaging retail annuities already available in the marketplace. And, now, you have the buying power of one individual instead of hundreds of millions of dollars in a retirement plan.

 

What are the challenges integrating guaranteed income solutions into 401k plans?

I’ll break it down into three main challenges. First is technology. The tech side is extremely important because you have to integrate the technology between the retirement plan companies and the insurers. The second is educating advisors and plan sponsors. The third and final is cost transparency. In my view, advisors and consultants should not recommend products that claim to have no cost. It is counterintuitive to use products that don’t disclose any revenue.

 

What solutions have you observed that effectively address the challenges in guaranteed income?

The biggest challenge of the three mentioned above is technology because you need connectivity between the insurers and the record keepers. If you guarantee someone’s balance, the insurer guaranteeing it needs to be able to access the information. To address this, there are a lot of middleware technologies in the pipeline, creating that connection allowing data to be sent back and forth. So that’s the most significant solution. Everyone’s talked about product and demand and all these things, but the reality is without the sort of infrastructure, it doesn’t matter how great the product sounds because it won’t work.

 

How do guaranteed income products fit into a broader retirement strategy and address longevity risk for retirees?

My grandfather retired at 60 and died at 61, and that was not uncommon back then. People would retire in their early 60s and their lifespan was maybe three years longer. Now people retire at 65 so you’re talking about 25-30 years in retirement. That means the longevity risk is significant and having these in-plan guarantees can provide at least some certainty for the rest of their life.

These solutions say no matter what, even if you run out of money, you’re going to have 5%, or whatever percent, for life. It’s giving retirees a guarantee: this is what your minimum income is going to be so they can plan properly. It’s impossible to plan when every single number that they’re looking at is a variable.

 

How important is flexibility in guaranteed income products for plan participants?

That’s a big one. Different types of products have different variables. Some products allow participants to stay invested in the market, and they will get a guarantee of 5% income for life. I like those because with longer lifespans, people are going to need to grow their income. The other solutions out there say, okay, at retirement, we’re going to take 30% of your balance and buy you a fixed annuity. The problem with that is this: those annuities don’t get you growth. So, for example, say that somebody just did an annuity in 2022, and they say I’m going to put $500,000 in there, and I’m going to wait 20 years. Maybe they get $1,000-2000 a month. That might work in the beginning, but what about inflation? Let’s say there’s 4% for the next eight years; you’re talking about losing 75-80% of their purchasing power. So I’m not a big fan of just putting them in an immediate annuity that has a fixed interest rate and doesn’t have any market growth.

 

What role do advisors play in educating participants about guaranteed income options?

Annuities are very complex, and most advisors, especially retirement plan consultants, are not annuity experts. So, first and foremost, advisors should educate themselves. I don’t say that to be critical; it’s just that these solutions are not what they were trained to do.

A lack of education is an overarching issue. Right now, there are no certification or licensing requirements, and in my view, there should be. People should be licensed to sell guaranteed income solutions inside retirement plans. These products are made to be simple for the participant to understand, but behind the scenes, they are highly complex. There need to be requirements with specific training about in-plan, out-of-plan, and fees.

 

How can plan sponsors evaluate the true costs and benefits of these products?

This is an important question. Fully transparent products, disclosing their fees just require a simple calculation. What’s the upside? Do I have more upside? And, what am I paying? For immediate annuities that claim to have no cost, there should be concern. Tell them what you’re making because it’s not zero. Nothing is free.

Right now, the law doesn’t require cost disclosure, which poses a challenge for advisors. It’s easier for advisors to use solutions that claim zero cost simply because they don’t want to have the tough conversation with clients and explain there’s a real cost for a real benefit.

 

What role do employers have in promoting guaranteed income solutions to their employees?

It’s a big role. I have yet to come across a plan sponsor that doesn’t care about their employees. They’re putting real money into these things, so they’re invested in them.

Employers can use auto-enrollment to get employees started, and auto-escalate helps participants increase their savings. And with these solutions, employers can say we’re putting your money in something that has a guarantee for you for retirement. If you choose to opt out, that’s your choice, but we provided the opportunity.

 

How do regulatory changes affect the adoption of guaranteed income products in 401k plans?

Secure Act 1.0 cleared the way to use guaranteed income as long as you test the companies you’re using. But it left many people wondering what it means to test them? That’s where Secure Act 2.0 came in and gave us guidelines on specifically how to test these insurance and financial companies to ensure that they’re financially sound.

We also had QDIA regulations, which allow plan sponsors to get participants invested properly. So now participants don’t have to do anything to get in. Don’t have to do anything to save enough. Don’t have to do anything to pick the right investments.

 

What would you like to see for the future development of guaranteed income products for 401k plans?

I’d like to see more innovation. When Secure Act 2.0 went into effect, everyone kind of rushed to market with these products and it’s just impossible to build a quality product that quickly. A lot of these companies are just taking single premium annuities that have been around since the 50s and 60s, repackaging them, and selling them as guaranteed income. It’s just the same thing that’s been around for years. I understand they want to get to market quickly, and some of them may be using it as a stopgap, and they plan to innovate down the line.

Then I look at other companies that have innovated products and created whole new funds wrapped with guarantees and that’s really innovative, multi-insured, portable stuff. That’s really cool and that’s what we need more of. It will push us to be better. We can push them to be better. I mean, ultimately, more competition is better for the end customer, right?