T. Rowe gets into 401(k) annuities

Apr 23, 2007 @ 12:01 am

By Susan Kelly

NEW YORK — Mutual fund giant T. Rowe Price Group Inc. said that it has started offering 401(k) plans in an online platform that participants can use to purchase annuities.

Two other 401(k) plan providers, CitiStreet Associates LLC and Hewitt Associates LLC, already make the platform, Income Solutions, available to the 401(k) plans with which they work. And last October, Fidelity Investments of Boston launched a somewhat similar product, Fidelity Lifetime Income Solutions.

Efforts to provide an annuity option to 401(k) participants are part of a growing focus on ensuring that employees have access to a guaranteed stream of income in retirement, particularly as defined benefit pension plans fade away and Social Security gradually replaces less of workers’ pre-retirement incomes.

Income Solutions provides 401(k) participants with “a good mix of competitive shopping, institutional rates and choice in terms of insurance providers,” said Matthew DiLiello, senior product manager at T. Rowe Price Retirement Plan Services in Baltimore.

Plan participants who want to turn some of their 401(k) savings into an annuity can go online to Income Solutions and get competitive bids on an immediate fixed annuity from nine insurance carriers: New York-based American International Group Inc.; Genworth Financial Inc. of Richmond, Va.; The Hartford (Conn.) Financial Services Group Inc.; Cincinnati-based Integrity Life Insurance Co.; Boston-based John Hancock Financial Services Inc.; New York-based ; Mutual of Omaha (Neb.) Insurance Co.; The Principal Financial Group Inc. of Des Moines, Iowa; and Prudential Financial Inc. of Newark, N.J.

From the perspective of a plan participant, “the way to potentially get a higher [immediate fixed annuity] payout is to competitively shop the product,” Mr. DiLiello said.

Participants can get an inflation-protected annuity if they choose. And Income Solutions, which is provided by Hueler Cos. of Minneapolis, promises institutional pricing from the insurance companies as opposed to the retail pricing participants would get if they went out and purchased the annuity on their own.

Plan participants that use Income Solutions pay 3.5% to 5% less than they would in the retail market, estimated Kelli Hueler, president of Hueler Cos.

There is no cost to plan sponsors. Participants pay Income Solutions 1% of the sum being annuitized.

Income Solutions functions outside the 401(k) plan, alleviating any concerns that a company sponsoring a 401(k) might have about fiduciary liability. Plan participants roll money over into an individual retirement account and purchase the annuity from the IRA.

Fidelity Lifetime Income Solutions also operates outside the 401(k) plan. The product, which can be accessed online, via telephone or at a Fidelity office, gives participants the ability to see pricing on the type of annuity they are interested in from five different insurers: Fidelity; The Hartford; John Hancock; Atlanta-based ING U.S. Financial Services; and The Principal.

“We’ve created the ability for the person to access multiple carriers in one conversation,” said Stephen Deschenes, executive vice president of product management for Fidelity Investments Life Insurance Co.

Offering annuities through retirement plans got a boost in 2005 when IBM Corp. began offering its 401(k) participants access to Income Solutions.

When the Armonk, N.Y.-based company decided that employees hired after 2004 no longer would be covered by a defined benefit pension plan, the question emerged about how to help employees covered only by a 401(k) and provide for income distribution in retirement, according toKaren Salinaro, vice president of compensation and benefits.

“We came upon Income Solutions as really a great way to provide, on a cost-effective, easy-to-use basis, institutionally priced annuity products,” she said.

There is a perception, however, that 401(k) participants aren’t all that eager to annuitize. A 2005 survey by Hewitt Associates of Lincolnshire, Ill., showed that just 6% of participants taking a final distribution from their 401(k) plan chose an annuity.

T. Rowe Price’s research and analysis shows that “a fixed annuity with inflation protection for a portion of a participant’s retirement assets can be really a strong product for a participant who is expecting to live a long time,” Mr. DiLiello said. But plan participants are reluctant to part with a substantial chunk of their savings to buy an annuity, he added.

“That’s where we see the inertia coming into play,” Mr. DiLiello said.

Ms. Hueler said that the reason people aren’t interested in annuities is that the education provided to 401(k) participants still focuses on how to save for retirement rather than with how to make savings last.



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