Lifetime Income: Weighing Costs vs. Benefits

Jen DeLong: As we talk about these Lifetime Income Solutions and DC plans, when you hear the word annuities, they’ve often been given a bad rap for being expensive, having a cost associated with them, but certainly provide a really important and valuable benefit, especially in this case that we’re talking about now. Can you talk a little bit about how plan sponsors should really think about weighing that cost versus the benefit?

Andrew Stumacher: When it comes to the annuity costs themselves, there’s really two types. There’s implicit costs, which is essentially the insurance company giving you a payout at 5%, them investing the money at 7%. And so, there’s really a 2% cost to you, even though you don’t see it. And then there’s also explicit costs in annuities, where you pay a flat fee every year whether that’s 1% or something different. And you want to make sure as a provider that you’re looking at what that implicit versus explicit costs are. And not thinking that, one is sort of no cost and one has a 1% fee and making a decision just based on that.

JD: I really wanted to have an apples-to-apples comparison.

AS: Absolutely. And then the other point to kind of make is, the institutional versus retail marketplace, a retail annuity is somewhere around 300 basis points whereas institutional are somewhere around half that. And so, [as a] plan sponsor implementing these types of solutions within your plan, you can really be doing your participants a big service in terms of getting them cheaper costs for a solution that is often better.

JD: I think that’s right. And when it comes down to it, there’s a really important benefit and value that are provided by annuities and there’s, there’s really no other vehicle that is designed specifically to be able to deliver the income requirements that are needed for the long lives of Americans and what we’re trying to solve for in DC plans.

AS: And it’s similar to other types of insurance that we have, whether it’s home insurance or car insurance. Yes, there is a low likelihood that you’ll need to use it, but in the event that, that you do, it can really save the day.

© AllianceBernstein L.P.

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