Retirement Annuity Accounts
Reducing risk and improving participant readiness
With many employees relying on defined contribution savings as their primary source of retirement income, Retirement Annuity Accounts (RAAs) offer employers a benefit plan option to provide employees guaranteed retirement income on an annuity basis.
Financial volatility raises retirement concerns
Over the past several decades, employers offering defined benefit (DB) plans for their employees have often taken on greater risk and been negatively impacted by fluctuations in the equity markets along with historically low interest rates. This significant volatility and burden has impacted their financial stability and ability to effectively manage their DB plans. Many employers have reacted to this volatility by closing, freezing, or terminating their DB plans to instead provide benefits through defined contribution (DC) plans.
Through employer-sponsored 401(k) plans and other DC arrangements, employees are typically left to take responsibility for their own retirement. This has shifted potential longevity risks, investment risks, and tax risks to employees that many are not adequately prepared for, or capable of managing over the long term. At the same time, significant fluctuations in interest rates and in the equity markets have contributed to significant volatility in employees' retirement savings—particularly for those near retirement. This drop in retirement savings often raises employees' anxiety and insecurity, and in many cases results in employees continuing to work longer and delay retirement.
Professionally managed Retirement Annuity Accounts could benefit employers and employees
As employers and employees strive to balance potential risk and long-term financial goals, an opportunity to leverage the expertise of insurance companies and other annuity providers has emerged. Retirement Annuity Accounts (RAAs) can serve as a complement to current retirement plans, providing a stream of future lifetime payments. Combined with DC savings and Social Security benefits, RAAs can provide employees more stable and comprehensive retirement income.
Comparing the options
RAAs allow employers to provide a DB-type benefit without having to assume the typical risks of a DB plan. With an RAA, benefit risk shifts to a third party—an insurer—instead of to employers or employees.
Insurance companies already provide expertise in managing risk for property, health, disability, and death for employees and the general population. As risk and money management specialists, insurance companies, annuity providers, or other third-party entities are often well-suited to help employers and employees by taking on retirement risk to help stabilize retirement for the future. Employees may be able to benefit from the potential for lower retirement volatility, while employers can offer a meaningful employee benefit that serves as an attraction and retention incentive and helps position the organization as an employer of choice.
Retirement Annuity Accounts
Opportunities for various employer types
Currently available products are employee discretionary, and the market demand is generally very low. Employees don't typically choose these products because they tend to be costly and price sensitive to the current interest rate environment. RAAs are different—they are automatic and based on employer-directed money. Annuities are purchased over a 20-year period and typically provide better pricing for a group vs. an individual.
RAAs could benefit employers and employees in the private and public sectors. Our proposed design (see slide show above) may work well for corporations, but could also be directly applicable for union, multiemployer, public sectors employers, and state-established multi-employer Pension Exchanges.
RAAs add an option to provide DB-type lifetime income to state-established multiple-employer plans for private-sector employers without the typical challenges of setting up a multiple-employer DB plan. Currently, the option is limited to providing DC-type plans with very limited options to get lifetime income. For union employees, as part of the regular union negotiations, the amount of the contribution to the insurance company could be negotiated. This could also provide a fresh-start opportunity to establish future union benefits with reduced funding, investment, and financial risk.
Deloitte helps bring insurers and employers together
Retirement Annuity Accounts offer a guaranteed income benefit without the investment management responsibilities for employers or employees. Deloitte works with insurance companies and employers to implement RAAs.
Services for employers:
- Retirement plan design to meet the plan sponsor talent objectives
- Analysis of various options to provide employee benefits—defined benefit plans, defined contribution plans, or Retirement Annuity Accounts
- Evaluation of Retirement Annuity Account providers and options
Services for insurers:
- Product design
- Managing risk and administrative solutions
- Market analysis