Kelli Hueler: Confronting ‘the Next Big Risk’ for Retirement

Our guest on the podcast today is Kelli Hueler. Kelli is the CEO and founder of Hueler Companies. Hueler’s Income Solutions platform has been delivering lifetime income annuity products to the institutional marketplace since 2004. In addition, Hueler developed a database of stable-value fund analytics and reporting. It sold that database to Morningstar in 2020. Kelli is nationally recognized as a thought leader on the topic of lifetime income and is actively engaged in related public policy matters. Prior to founding Hueler Companies, Kelli held the position of a financial planning professional for IDS Life and was a registered representative for Kidder Peabody & Company, where she was responsible for institutional and retail clients. She received her bachelor’s degree from St. Olaf College in 1981.

Background

Bio

Income Solutions

“Morningstar Investment Management and Hueler Income Solutions Offer Integrated Lifetime Income Service,” Morningstar.com, Feb. 15, 2022.

Annuities

What Is an Annuity?

Annuity Types

“What the Future of Annuities Means for Advisors,” by John Manganaro, thinkadvisor.com, Oct. 6, 2022.

“Savings to Income: Creating a Paycheck for Life,” by Kelli Hueler, wiserwoman.org, Sept. 13, 2022.

“RIAs, 401(k)s, and Annuities: Is This the Future?” by Kerry Pechter, retirementincomejournal.com, Feb. 17, 2022.

Stable Value

“Trends Impacting Defined Contribution Plans and Stable Value,” by James Smith and Kelli Hueler, stablevalue.org.

Other

“David Lau: Taking High Commissions Out of Annuities,” The Long View podcast, Morningstar.com, June 21, 2022.

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Kelli Hueler. Kelli is the CEO and founder of Hueler Companies. Hueler’s Income Solutions platform has been delivering lifetime income annuity products to the institutional marketplace since 2004. In addition, Hueler developed a database of stable-value fund analytics and reporting. It sold that database to Morningstar in 2020. Kelli is nationally recognized as a thought leader on the topic of lifetime income and is actively engaged in related public policy matters. Prior to founding Hueler Companies, Kelli held the position of a financial planning professional for IDS Life and was a registered representative for Kidder Peabody & Company, where she was responsible for institutional and retail clients. She received her bachelor’s degree from St. Olaf College in 1981.

Before we get started, we wanted to share a bit of disclosure.

In addition to Morningstar’s acquisition of Hueler’s stable-value database, Morningstar’s Retirement Manager service, which is offered by Morningstar Investment Management, links to Hueler Income Solutions.

Kelli, welcome to The Long View.

Kelli Hueler: Thanks. It’s great to be here today.

Benz: Well, it’s great to have you here. We wanted to start with your origin story on retirement income. You’ve noted that your interest in this area began on a trip to Japan in the late 1990s. Can you talk about that?

Hueler: It was a little bit ironic. I was asked to come to Japan to talk about the role that stable value plays in the defined-contribution system in the U.S. So, I wasn’t intending to go there for anything related to lifetime income but soon found out that there was a reason that I should be very much thinking about it. Because what happened was, the year I went, there was a group of insurance companies that all wanted to be part of additional discussion outside of the group setting. And I met with them one-on-one to talk about their products and their structures and what they were facing. And interestingly, they were at a point where they had a very significant dilemma, aging population, a healthy population, but also, they were at zero interest rates. So, they had no way to help supplement income for those that were living off of their savings, no effective way at the time that was a secure and safe option. So, we got into a lot of discussion about that. And for the very first time ever, I realized that longevity was going to be the next big risk our defined-contribution system was going to face—that we hadn’t gotten there yet, but there would eventually be somewhat of a tsunami of those of us that would be in the baby boomer era, retiring without a secure pension. So, that’s what really started it for us.

Ptak: What led you to conclude that annuities were an important part of the retirement income puzzle?

Hueler: I think about it this way. We were in the institutional side of the market and worked with large insurers on group annuity contract structures, which were really designed to either mitigate risk and/or produce some level of predictable income. In addition, they all typically had pension funds. So, the people that retired from their organizations had the benefit of these lifetime income, forever sustainable income. That’s a pretty big gift in the age we live in. So, when we looked at across the defined-contribution system and we’re like, look, we don’t have a whole host of people that will ever have access to pensions. What can we do to create personal pensions? And the annuity in its stripped down, very streamlined base capability is exactly that. It’s a piece of a retirement portfolio that can be sustained and produce income for life. And from my perspective, I don’t know anyone who is nearing, at, or in retirement that’s not thinking about sustainable income.

Benz: A related question is, it seems like Social Security has all of the attributes and then some of annuities. And I would guess you would agree that the first stop for people who are eligible for Social Security is to make smart claiming decisions there. But how should people know and what’s the benefit for a person who is in retirement relative to Social Security to add additional annuity income?

Hueler: I think you’re absolutely right on. That’s a critical component to the decision-making process for folks as they move into retirement, making smart claiming decisions, and Social Security can be foundational for, will be, for millions of Americans. And it’s extra additionally helpful because of its natural link to inflation. So, the inflation protection there is really unparalleled in other products. So, that’s critical.

I think the question about do I need additional income really comes down to—we like to think about it in a very simple way—really, what is my baseline income need? And if an individual is looking at their savings and they’re looking at Social Security and maybe potentially a pension—if they have a portion or have a very good pension either way—really the goal is to figure out, do you have an income gap? And it doesn’t have to be a complicated exercise, but you do have to think about it in terms of what is going to keep me in a position to live comfortably and how much income do I need to have? What’s my need versus what are my wants and what are my goals? So, baseline income need, do I have a gap, and then think about, should I supplement the other sources of income that I have with an annuity or a personal pension.

Ptak: What do you think is the biggest misconception about annuities?

Hueler: This is a great question we struggle with a lot, because in fairness, people have the right to be very skeptical about annuities given how they’re packaged and sold in the retail space. They’re complicated, they’re opaque, you can’t ever really figure out the fees, even if you learn some, you don’t usually know all. And I think that whole reality has bled over into every time they hear the word annuity. So, I think what’s important is for people to know annuity is a big catchall term and it doesn’t really have to apply a lot of the ills of the annuity space. We actually used to say it’s like the A word. It’s just something that you don’t want to say because it evokes all of this emotion about expensive, complicated, scary products. But actually, the purpose of the annuity should be to do one thing, which is to provide sustainable guaranteed income for life. And if you take out that baseline capability and you look at it and that’s what an annuity vehicle is, it’s very different from what people’s perceptions are and the reality of what people buy in the retail space. So, in fairness to everybody out there, there is probably a very good reason that people feel skeptical and hesitant around when the word annuity is mentioned.

Benz: What are some of the other reasons that you think consumers tend to be averse to purchasing annuities? I know that there’s been a lot of academic research that shows that people are probably under-annuitized relative to what they could be doing and how that might help them extract maximal retirement income. But can you talk about the other impediments in addition to the fact that there are just some really poor products out there that have tainted the reputation of annuities?

Hueler: I think there’s maybe a couple of key things to think about. I think people have heard over and over it’s an irrevocable decision. Once you put your money into an annuity, you can’t get it back. You lose all your liquidity. You lose control. Those are very strong words when investors are trying to make decisions for themselves. Rather than having the explanation that an annuity, number one, should only be a small portion of your total income strategy, most likely. Maybe not at all. It’s not for everyone. But I think key things that you hear that turn people away is that lack of control, lack of liquidity, inability to make a different decision. And because it’s portrayed that way, people never get the real opportunity to say, well, I’m going to have a whole variety of resources that I’m going to employ during my paydown phase. It’s not one product. It will probably be several and should be. So, I think people shy away because those realities that when you put your money in and it turns into income, you don’t get to have it back. You’re transferring risk. You’re transferring risk to the insurance company with a portion of your resources to guarantee income for life. But what’s not talked about is the fact that that decision should never be made in isolation. It should be made along with looking at your whole savings portfolio.

Ptak: What about incentives? One theory for under-annuitization among investors is advisors have certain conflicts of interest. They’re charging clients a percentage of their assets on an ongoing basis. So, they don’t necessarily have an incentive to recommend a strategy that removes fee-generating assets from the portfolio. Do you think that’s another major factor in why there aren’t more people using annuities?

Hueler: I will say I do. That’s in both the institutional and retail space. That’s not just retail alone. That’s also advisors that are fiduciary advisors and they’re compensated through assets under management, AUM. So, I think that that’s been a conflict that we should all just put out on the table and be very candid about. But I do want to say that in the last five years, we’ve seen a dramatic shift in understanding within the advisor community. It’s interesting, I did a podcast actually for the CFA group at one point about curriculum and why this risk management capability is missing from the curriculum, whether you’re a CFP or a CFA. You didn’t learn about risk mitigation, longevity, and market risk during the paydown phase. Nobody talked about the risks of retirees in the paydown phase being so different and the sequence of return risk being so much greater in the paydown phase than in the accumulation phase. Nobody really has given advisors those tools early on in their thinking and developing their strategies to understand annuitization as a form of risk mitigation.

And also, another key thing is I think advisors have been sensitive to what the truth is around annuity products, which the pricing of those products is not beneficial to the end user, to the individual investor, and it does impact the return over time. I think until they see, when advisors can see modeling that shows low-cost lifetime income being used as part of a portfolio, I think they’ve been much more receptive to that. So, yes, I think that conflict of interest is there. But I think really what’s been missing is a discussion about where this fits in as a tool to manage risk and longevity and market risk in the paydown phase. So, I’m hoping that this continues to be a conversation that the academic community has but also that the advisor community has more openly about how these products and this capability and this risk mitigation fits into a balanced portfolio.

Benz: I want to go back to Social Security. And I don’t want to get too in the weeds, but during that inflationary environment that we’ve had over the past couple of years, Social Security did exactly what one would hope it could do and that it delivered people very nice inflation adjustments. You can’t, as far as I know, buy annuities that are linked to the Consumer Price Index, where your payout is going up in line with CPI. I know that some advisors, very good advisors, overlook the whole category because of that lack of inflation protection. How do you think about that?

Hueler: I think that’s very fair. One of my dear friends Zvi Bodie, years ago, we had this discussion about linking to the CPI-U as Social Security does and creating product that can do that. And we were actually the first group to put three insurers up with standardized features on fully inflation protected product—and this was in 2007 and ‘08, ‘09, maybe ‘06, ‘07, ‘09. And we were able to get three insurers to agree to it. But here’s the problem. Even though they were willing to price that, and everything is about risk transfer and the ability to underwrite that risk transfer. So, when you transfer the risk of full inflation hedging to an insurer, the cost of that product is going to go up, which means your income is going to go down. So, when we looked at the product and we made it available and we compared it to nominal cost-of-living adjustment—so, there’s three choices: nominal, cost-of-living adjustment, and full inflation protection. And the academics would say, and those economists would say always choose the full inflation protection. But the cost of doing that in a product other than Social Security is very high. It was between 16% and a 22% haircut on the income. And when that happened, people would look at that and that’s very hard to swallow to say, I’m going to purchase that now and when inflation hits, I’m always going to know that I’m going to be ahead of that. Crossover point is a long time.

So, I think for products that are constructed in the annuity space, it’s getting to something that is close enough to a hedge, meaning at least inflation adjusting and/or cost-of-living adjusting. If you can’t directly track the CPI-U, you could track either a 2% or a 3% per-year increase—that’s an effective way to lower the cost because insurers can underwrite that risk much more cost-effectively. And when they can do that, you’re going to have a higher level of income. We found in our data that when you presented all three to investors, they typically chose an annual increase as a middle ground.

Ptak: Can you talk about the interplay between annuities and interest rates? How have today’s higher yields affected annuity payouts for instance?

Hueler: It’s quite substantial. We were looking at our data. We were talking with a client, and they had some similar questions, and we were looking back to the low point in rates in 2020. I think it was about every $100,000—so, if you take $100,000 life-only annuity, it was paying about $502 a month, so that’s going to give you $6,020-some a year, roughly. And in 2021, nothing much had changed. It was maybe a dollar or two difference. But in 2022, it had started to jump up. It was $620 a month. And in 2023, that same $100,000 life-only annuity is paying $652 a month and that gives someone $1,800 more per year than what you would have been getting with the same exact quote in 2020. So, there’s no question interest rates play a pretty significant role in the monthly income that’s generated off of an income annuity. But I would say if you look back, even at the time in 2020, if you look at the 4% rule and that’s the paydown rule and you look at what an annuity was paying, a fixed life-only annuity, it still was very competitive. I think there’s a misconception that low rates mean that the annuity product will be very similar to something else like a CD. I think people should always explore those options because that tends to be that the annuity is much higher. And as you know, you’ve traded off your liquidity, so you should be paid more.

Benz: We want to switch over to discuss Income Solutions and the genesis for it as a comparison-shopping platform for people. You earlier mentioned, Kelli, the lack of transparency and just how opaque the annuity space is. So, can you talk about what got you started on thinking that there should be some platform where people could compare annuity products apples-to-apples?

Hueler: Yes, I think this is great because it brings us back to stable value and the crossover between what we were doing with stable value and the Income Solutions platform. So, when Hueler started their stable-value capability, the business for the research and development, we were also negotiating contracts and creating specifications for the large institutional buyers. And it was a very straightforward process. The specs were always apples-to-apples. There was never any monkey business that was allowed. It was very, this is what you can bid on, and that’s all we are going to accept. And every single insurer had to provide a bid on only that was what was requested. In addition to that, there were always multiple quoting, companies quoting, there were multiple bids. We always had a lot of competition, and it was very transparent—the costs that were willing to be paid were on the table.

So, when we set about to create a platform for individuals, our goal was to take that institutional purchasing process where we know that the buyers have really all the power and say, we’re going to create a very similar process, as close as we can get, and maybe improve it for the individuals so that they’re going to have meaningful competitions, full transparency, fee-level and feature-level specs in essence, because Hueler defines all of that upfront and that’s done in advance. And then the individual can pick and choose which features they want. But when those quotes go through the system, those insurers can only respond to the quotes that are submitted. And they have to respond only on the features that are requested. There’s no marketing. It’s a fully transparent process and a system that really delivers the best possible outcome for the quote that’s being requested. And it’s a live system. That was the other thing that was just so missing from the whole process in the retail world.

There was nothing live. There was a lot of estimates and a lot of illustrations, and well, I’ll go see if we can get you that rate today. And we said, no, this is going to be real time, just like the market. And when you submit a quote, it’s going to be purchasable. So, the foundation was fee transparency, open, meaningful competition, issuers that were selected from a pool based on credit quality and other requirements. And then, we brought forth the best that we could, and technology has been a huge friend for us, because we’ve gotten to a place where everything is real time right in front of the consumer. So, it’s all done very efficiently and within seconds.

Ptak: Does Income Solutions, does it just help with the comparison shopping and education aspect of an annuity transaction, or does it take the consumer through to point of purchase, so to speak?

Hueler: It definitely is heavily weighted toward helping consumers—what we say is to consider annuitization, so to have a process where they can learn about annuitization, they can learn what an annuity is as simple as that, or if they’ve already progressed and they have enough knowledge, they can get right into quote comparisons. And it gives everybody the tools that they need to meet them where they are in the process, but it takes them all the way through, too, so that if they say, yes, I’m ready to make a purchase, it’s all done right there online—even their application is provided to them online, so the purchasing can occur all in one place.

And then, this might be even one of the questions you guys wanted to cover, but I’ll throw it out there. I think having people who are licensed specialists, that really their only goal, they’re not salespeople, they’re not compensated on sales, they’re there to shepherd a person through the process if that’s what they want, answer a simple question if that’s what they need, and really make sure that the participant experience, the individual experience, the investor, that’s what it’s all about for them. So, the folks on our desk, that’s all they do. We get a ton of great feedback. We think it’s working well. And I think most people when they want to think about annuities, that’s what they need, is some objective person that they can ask a few questions to.

Benz: It seems super valuable, but I think our listeners, and I’m wondering, what’s the business model for this? How does Hueler make money from people taking advantage of this platform?

Hueler: That’s also very transparent. We disclose everything at the site so that people know exactly the cost. But Hueler’s business model typically includes the employer or the organization that we partner with, paying Hueler part of the cost that it requires or the costs that are required to maintain the program. We charge a fee for access to the program and for providing the technology to whoever the partner is, if it’s an employer or a partner. And depending upon who that is, typically their participants, if they’re a plan sponsor, then access the program. And as the participant moves through, they’ll see that a fee of 1% one-time transaction cost is added to every quote that they see. So, that’s already factored into the quote. And that’s the way Hueler is compensated, those two avenues.

Ptak: What types of annuities are available for assessment on the Income Solutions platform? And relatedly, how did you decide what types of annuities to feature on the platform and which to avoid? It doesn’t appear that you offer variable annuities or fixed-index annuities, for example. So, how did you make some of those choices?

Hueler: It’s really an important question to ask because our goal was very simple. Our goal was to create an income annuity platform that was streamlined, and every product was fully comparable. So, that’s a foundation. The other piece is, we really believe that most of the time when people come to us and if they have access to, especially 401(k) plans where their plan sponsor is providing an array of investment options that have been vetted and have very low-cost fees associated with them, they have fiduciary oversight to encourage them to move into an investment product where the margins are substantially higher in order to obtain an annuity feature. We didn’t feel that that should be part of our mission.

The other thing is, variable annuities and index products, they serve a great purpose, they can be a great tool, but they’re very difficult to compare because they’re complex. The formulas that are embedded, there’s no similarity, there’s no requirements for them to be similar. So, it’s very difficult to say one is, per se, better than another and they’re dependent upon track records of the investment funds that are associated with them. There’s a great deal to consider when you consider that type of product. And it’s almost impossible—and trust me, I’ve tried—to create a grid and to create comparability and to add value to that process for us. So, Hueler just doesn’t feel that there hasn’t become a product suite that we could look at and say, wow, we can really create comparability here, and the fees are transparent enough and the factors and the calculations that are being used are close enough that we can create a service that would have value. I just don’t think that our underlying benefits that we provide to an individual considering income annuities, they don’t translate into the variable annuity and the index annuity space.

Benz: Jeff and I had previously interviewed David Lau of DPL, and they’re involved in, as I’m sure you know, creating annuities, issuing annuities. Hueler has decided to not be in that manufacturing space. Can you talk about your thought process there?

Hueler: It goes back to I think our roots. On the institutional side, we just think there can be no conflicts of interest whatsoever. From our perspective, if you’re a manufacturer of product or you’re an investment manager and you’re selling either one of those services, it wouldn’t be conflict-free to be marketing that. From our perspective, our role needs to stay a lot like we were in the stable-value space. We were the independent entity that provided reporting and did analysis and made people smarter investors and made people smarter about risks. In our role in the platform, our job is to ensure that the annuity quotes are standardized, that features and fees are all standardized, that the insurers on the platform are of the quality that should be required and that the individual users have the tools they need to make an informed decision and to get the best possible rate in the market that’s available to them at the time they’re making those decisions. I just don’t see how you do that and be a manufacturer of product or an asset manager or a distributor at the same time.

Ptak: Can you discuss your previous relationship with Vanguard? Why did Vanguard decide to do away with Vanguard Annuity Access, which Hueler had been powering?

Hueler: We still have our relationship with Vanguard. They chose to exit only the retail annuity distribution space. We were the backbone for all of their retail and institutional delivery, and we’re now still the backbone for their institutional 401(k) program. But they chose to no longer be a distributor of either variable or fixed-income annuities to the retail space. I don’t know why that decision was made. That’s above my pay grade. But they didn’t have a need for it any longer on the retail side. But one of the things that I think both Vanguard and Hueler recognized is that there were a lot of folks that had used the Annuity Access program and Income Solutions through that. So, we opened a portal, which is still open to the public—in essence, it was a way for anyone who was familiar with the program or wanted to continue to access the program would be able to do so. We still have a good relationship with Vanguard, but I think that was a business decision that really Hueler had no role in. And like I said, they exited the variable annuity space as well.

Benz: I noticed that Income Solutions provides details on financial strength of the various insurers that are backing these contracts. Can you talk about how people should use those? I always struggle with that. And what would you say is the minimum threshold that one would look for in terms of financial strength? And then a related question is, I sometimes hear from advisors who are skeptical of the state guaranty funds that are backing insurance companies. Can you discuss that as well?

Hueler: Sure. You have reason to be skeptical about the ratings agencies. I’ll be very frank. I’ve been in this business over 30 years, and I’ve watched AAA companies go to nonrated very quickly. So, we’ve always taken the position that at a minimum we need rating agencies in the A and above category—the issuers have to be there before we’ll consider them. But then, we’ve been doing insurance company review and oversight for the better part of three decades as part of our role in the stable-value space as well, and we carried that over into Income Solutions. And in addition to that, we decided, I think—I don’t know if it’s been 12 or 15 years, it’s in that range. A while back, we hired a firm that all they do is quantitative analysis on balance sheet. And we work with them. They are our right arm when it comes to the analyst role. And they do all the number crunching and all the modeling, and every quarter we review insurance companies that we have on our list, and we keep a very good, healthy list.

But when it comes right down to it, not only do issuers have to meet our credit-rating qualities and our ongoing oversight of their financials, but they also have to be willing. This is a big issue. So, if you don’t see certain names, you think, why are they not on Hueler’s platform? If they’re not willing to substantially cut their commissions and be willing to go down to our one-time 1% level, we can’t work with them. They have to be willing to feature-level and fee-level and come in line with our standardization. That’s another layer on top of the credit quality and the analysis that gets done and the oversight that’s ongoing that Hueler handles with our outside analysts every quarter. So, that’s the way we handle our view of the financial strength. We don’t just rely on rating agencies, but we do use them as a minimum and we would say always A and above. And that also is an institutional rule. Most of our institutional clients always use A and above. So, that’s what we do on that side of the equation.

In terms of the state guaranty fund, everybody is concerned that those are not funded the same way people are concerned about a lot of maybe state agency-type pools, the risk pools that are not funded properly. But I think there’s a couple of things. The state guaranty fund is there for a reason. It is backed by the state, the agencies, but also the entire country has a state guaranty fund, and the insurers are all also part of what I would say is you think of it is, if one insurer goes down and annuitants and/or insured are not protected, that’s going to infect the entire scope of insurance companies across the country. So, there’s a very strong drive to really push to continue to increase the financial well-being and strength of the state guaranty agencies and oversight. But I would say, there’s probably nothing perfect, and I wouldn’t say that you should ever base your decision solely on that because I think that’s not a good risk to take. One of the ways we encourage people to mitigate risk even further beyond credit ratings and beyond the state guaranty fund is to think about diversifying across insurers so that you have a portfolio of income annuities, not just a single annuity with maybe up to the state guaranty limit, maybe you go down to a third of that. So, those are the kinds of things that I think every savvy investor should think about because risk is definitely a part of the equation.

Ptak: Before we move on to annuities and company retirement plans, which is a topic that we’re keen to pick your brain about, does income solutions provide any guardrails to help ensure that an individual doesn’t overdo it, over-annuitize?

Hueler: Yes, we do. And I’m not going to say it’s always popular. Sometimes we get pushback from individuals that say, I want to be able to purchase whatever I want to be able to purchase, which I understand. But we do have a rule of no more than 50% of their available investable resources. It’s just, we review every application that comes through the system. So, we need to be willing to say that we believe that a contract is suitable. And our feeling is that you don’t ever want to over-annuitize because, again, back to our earlier part of the conversation, once you turn that annuity on, it’s not revocable without substantial penalties. So, you want to make sure that you’re annuitizing the appropriate amount of your resources and to really think through that. And we just sometimes have to tell people we’d be happy to help, but we really have to reduce that amount. They’re not used to being told that. And I think sometimes people feel a little bit frustrated. But when they really look at it in the scheme of things, I think people appreciate the fact that they have to take a second look at everything and think a little more deeply about their overall goals.

Benz: As Jeff referenced, we do want to delve into defined-contribution plans, 401(k) plans. It sounds like Hueler’s services are available to some 401(k)-plan participants where they can do this comparison shopping through their plan portal. And the SECURE Act provided safe harbor for company retirement plans to offer annuities inside the plan. And so, I think some people thought, well, the floodgates will be open, we’ll start to see more of this. Have plan sponsors taken action to add annuities in the wake of that legislation?

Hueler: The way I would describe it is there was not a floodgate that opened, for sure. But one great thing about it has been it inspired plan sponsors to look at the various solutions to move from, I’ll think about that at another time or we’re thinking about it, to really move more toward getting ready to take action and to start doing, really, I think sincere evaluation of the different types of products and services that they could add to their plan. We’ve been very vocal about the fact that we are agnostic as to whether a plan wants the solution in-plan, or they want it as a voluntary out-of-plan option. And we’ve offered it; we’ve told all of our clients we’ll go either direction. So far, we don’t have any plan sponsors that have chosen to transition the program to in-plan or to adopt an in-plan program.

I think it’s still new, but I think the key issues that plan sponsors have to wrestle with, even though there is a fiduciary safe harbor for selection, they still have concerns about the product structures like we talked earlier. Some of these in-plan options are very complicated and they have layers of fees. When you get into complexity in fees, a plan sponsor is very judicious about spending money and having participants have to spend money as well as their participants not understanding, having clarity of what that product is—if they don’t feel they can explain it, how in the world would they feel comfortable providing it to a participant?

There’s one other real issue that sits out there that’s not talked about a lot, but it is a very real issue for plan sponsors, which is, a lot of these programs, again, they focus on the fact that you have the liquidity, you can do whatever you want, you can change your mind. They don’t talk about the cost of doing that. And one of the costs can oftentimes be what’s called an unrealized benefit. So, a person can participate in a program over many years and pay the fees each year—for protections they don’t end up using and the conversion values that they don’t end up using down the road if they change their mind. I think, the reality of an unrealized benefit is also a fiduciary concern that’s not addressed in the fiduciary safe harbor. There’s still work to be done. I think it’s really positive because it’s helped people start giving serious consideration to an in-plan option. And like I say, we’re agnostic, we would go either direction depending on what our clients want and need.

Ptak: It seems like we’re in the midst of a sea change with respect to plan sponsors hanging on to participants after they’ve retired. What’s driving that in your opinion? And do you think it’s a good development?

Hueler: It’s such an interesting question because when we started this, there was the wave—you guys probably remember—it was like everyone wanted, OK, if you’re done, if you’re retired, out of the plan.

Benz: Right.

Hueler: I was like, I don’t know, why is that? I used to ask that question all the time. And everybody had reasons. Now I see that sometimes like anything, the pendulum swings too far. It feels like it came back to a more realistic point of saying, OK, wait a minute, we have all these great employees that we’ve helped get this far. Why would we not want them to continue into retirement being able to take advantage of, avail themselves of this capability we have under our umbrella. They’ve worked for us for 30 years, 20 years, 40 years. For goodness’ sake, why do we not want them there? And oh, by the way, keeping assets in the plan keeps you a competitive provider of the service. If your assets are going to dwindle because you have a whole host of people retiring, you’re not going to be able to be as competitive in terms of your overall negotiations in the marketplace. I think it probably benefits both parties. I thought a lot about it. And it’s like, well, I’ve always wondered why in the world were they hurrying people out the door when people really could have used it. And the worst possible thing is to go out of the plan and buy a bunch of retail products and spend a bunch of money they don’t need to spend. Why not stay in the plan? And if employers can benefit from that, and they can see their way to continuing to produce really quality benefits longer term, I think it’s a win-win.

Benz: You mentioned that the pendulum swings back and forth. Would it be possible for it to swing too much in the direction of assets staying in the plan? And what are downsides that maybe I’m not thinking about associated with that?

Hueler: I always think about what individuals, what they have access to. So, you’re right. If they stay in a plan and if they go into retirement and they never check or look or have any assistance or don’t avail themselves to any advice, I guess maybe you could say, that’s a myopic view and we never really want to be there as an investor. But I think maybe the benefits outweigh that if they are accessing… When I think of the benefit plans of the organizations we work for, it’s pretty impressive what they can do for their employees and for their retirees. So, you would hope that they continue, if employers continue to be focused on really producing quality benefits at low costs for people, because we all know fees erode returns and outcomes. It’s just a reality. If you’re going to live 25, 35 years in retirement, keeping your resources in low-cost services would make good sense no matter what.

The other thing is advice. If people have access to good advisors and quality advisors, that’s what matters at the end of the day. If they have an outside resource that they trust and they can utilize as outside eyes and ears and they can say this plan has got their returns or this or that or we think you need to make change, well then, they have a trusted source. Or maybe, let’s say, this option is really great, but we think you need to do some other things here. So, a participant and a retiree can stay in place in some things and use their moneys and deploy their resources through trusted advice in another area. I like the fact that this keeps continuing to produce good results for everyone in the plan. And then, as most folks say in retirement, they can access good advice resources. That’s key.

Ptak: What’s your thought on giving participants the opportunity to buy into annuities in the accumulation phase so that they experience a variety of interest-rate environments and can maybe effectively dollar-cost average into the annuity? Does that seem like a good idea to you?

Hueler: Yes, I’m a huge fan. I think it’s a great idea. I think the problem is in the mechanics and the execution. There’s no doubt that if you’re young and you can start accumulating and you can do that over time and go through interest-rate cycles and so on, I see that as nothing but positive. I think the problem is in the product structures that so far have come to market that there’s one of two things that seem to always be at issue. One is, oftentimes they’ve been single-issuer solutions, and we are huge proponents of choice and competition because we know that drives better outcomes. So, when they’re a single-issuer source, that’s a limitation that fundamentally just doesn’t fit with our philosophy.

The second issue is when they’re complicated and costly over time. If they’re not streamlined, if they’re low-cost and they’re streamlined and they’re simple and not complicated—so there’s not a lot of expense with all the risk transfer and there’s not layers, then I think that would be an outstanding product to be developed. I don’t see a lot of that right now. I see much more of the other. So, I think as an industry, the margins just aren’t there. The products that Hueler offers, the margins aren’t there for a lot of insurers. They want to have higher-margin products. But those that will and come to the table, that’s how you produce great results. And I just think the accumulation side really there needs to be a fire lit under the providers and manufacturers to come up with a lower cost, more streamlined product suite that plan sponsors could get comfortable with.

Benz: So, if I’m understanding this correctly, it seems like TIAA Traditional is a good example of what you’re talking about, is that right, the annuity that would allow participants to buy in?

Hueler: Yeah.

Benz: Why aren’t there more things like that, that it’s just a low-margin sort of product, is that what you’re saying?

Hueler: Well, I think TIAA has a very unique business model. They’re a great company. We think what they’ve done is fantastic, and we love the way they lead people through the process and bring people to a place where annuitization makes sense. So, they’ve done so many things right. I think the problem always is when it’s a single-issuer solution. Competition never comes into play, so pricing is really always up to the insurance entity. And I just think that that—again, I have an institutional bias. That’s my bias. We think that has to play a role in the future of those products, and so far, that hasn’t come to pass. We don’t really see it. But I think TIAA is an outstanding example of a successful program.

Ptak: We’re going to turn to stable value. Before you started Income Solutions, Hueler Companies focused on providing research on stable-value funds. Can you simply describe what stable-value funds are?

Hueler: Sure. So, stable-value funds are basically a pool of insurance contracts and now in today’s world, synthetic investment contracts that function that way, that have built-in levels of protection relative to market fluctuations and stability of income. It’s kind of like a collective trust fund is the most common terminology around that. And they hold multiple contracts. So, again, this exposes my bias. Those pools have multiple contracts from multiple providers, and things can be moved, and it’s not a static single-issuer program. It’s a pool of diverse products and providers.

Benz: I wanted to ask about stable value. As far as I understand it, as a retail investor, you can’t just go out and buy a stable-value fund. The only context in which you can own one is through a company retirement plan. What are the roots of that? I remember when the decision was handed down. Gosh, it’s been a while, but maybe you can talk about why that is.

Hueler: This is something that people really struggled with in 2008, around the time that we had real market challenges. A lot of folks had left their stable-value fund. They’d left their employer, they’d rolled money out. They wanted to roll their money back into the plan and get into that stable-value fund. And it was very hard to say, the individuals can’t do that. But, again, back to the structure and why it’s structured for a plan. When you think about the underwriting risk that is involved in a pool, and in a pool of multiple providers, as well as many, many, many individuals. So, you could have a pool of thousands of individuals. And as part of that pool—this is one of the things Hueler did when we were providing stable-value reporting—we developed what was called a cash flow risk assessment summary. Well, cash flow, that’s what defines whether or not those funds participate into a market or not, and whether they keep themselves cash, the ability to provide all the liquidity. So, cash flow is a central part of underwriting contracts that go into these complex pools.

If you think about that and you say, well, let’s see, an individual wants to buy a stable-value contract, one individual could sway the entire experience of the underwriting and the insurers or the banks or whomever are providing the program, the product. So, it has to be in a pool. And the next thing is optionality and choice and movement of money. And people who are willing to accept the levels of returns that the stable-value fund has, they’re usually investing in shorter-term investments, and they have more movement of their money than in a 401(k) plan. So, the underwriters in a 401(k) plan can track all the aspects of the cash flow characteristics of that pool, whereas in a retail pool, you’ve got investors doing whatever they want, when they want, and optionality is really expensive. There was a time when we had hopes for a mutual fund that could be created to offer individuals access to stable value, but the expense ratios got so high to cover all the various risk assessments, it didn’t make sense. We were back to money market in terms of what the total return was. So, I think that’s the hard part to understand, is these are underwritten for a whole variety of risks and those cash flow risks are a big part of it. And the characteristics of a retail investor versus a 401(k) investor is one of those risks.

Benz: One thing we’ve grappled with, with respect to looking at stable value is whether a firm’s wherewithal in terms of managing fixed-income assets is a good proxy for how good it is likely to be as a stable-value manager. Do you have any thoughts on that?

Hueler: So, let me clarify. A fund manager or an asset manager, whether they…

Benz: Yeah.

Hueler: Yeah, OK.

Benz: If they’re good at fixed income generally, could we reasonably extrapolate that they are probably decent at stable value, assuming that the stable-value fund has decent expense ratio?

Hueler: I think that as long as you can validate that they have a good track record… If they entered the market with no track record—I recall the days of doing fiduciary oversight with plans, helping them through that and looking at track records. Someone could have a great track record in the fixed-income space, but if they didn’t have a team of folks that were dedicated to stable value with a track record, I think that makes it a little more difficult for a fiduciary to make that selection. I don’t think it means that they won’t be very good at it, but I do think it makes it more difficult.

So, most of them, they’ve dedicated resources. Stable value has been there a long time. I think they can certainly get data on asset managers that manage what we call the pooled funds. And if they’re running a pooled fund and that’s got a track record, which it will have, it’s pretty good proxy for whether or not they have a really good team of stable-value folks dedicated to stable value. They typically would have a large pool that they’re providing to the market. And if they don’t, it’s not a difficult task to ask for examples of who they run stable-value assets for. And that’s not a bad proxy to find out who the sophisticated clients of theirs that they’re running stable value for.

Benz: Well, Kelli, this has been such a helpful conversation. Thank you so much for taking time out of your schedule to be with us.

Hueler: Well, it’s been fun. I hope everybody enjoys the conversation as much as I did.

Ptak: They will. Thanks so much.

Hueler: You bet.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter at @Christine_Benz.

Ptak: And @Syouth1, which is S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)