"The Revolution Will Happen in the Workplace" — The Generational Comeback for Carriers in 401(k)

Paul Tyler (00:30) Hi, this is Paul Tyler and welcome to another episode of the L&A Hub — Life and Annuity Hub. Ramsey, different name, but...

Ramsey Smith (00:40) Different name. It feels very different to hear you say that — like, you're 250-some-odd episodes at the other one.

Paul Tyler (00:44) Right, well — listen, I've got a great guest, somebody who was a co-host of mine on another podcast, which was That Annuity Show. Ramsey, how many — 260 episodes or something like that? Yeah. Listen, I know that show is continuing on, which is great, but moving on to another one, and I think this is a great opportunity to introduce you to a little bit of a different audience. We've got some of the same people, but different. So why don't you just tell people, Ramsey — who are you and what do you do?

Ramsey Smith (01:27) So Ramsey Smith. I'm a former investment banker who set out to change the world of annuity distribution some number of years ago. After a couple of different iterations, I really came to the conclusion along with my partner, Graham Clark, that the best way to bring guaranteed income to the broadest possible audience is in the workplace, through 401(k). So I like to say: the revolution will happen in the workplace.

We went through an iteration where we focused on direct to consumer — trying to sell annuities online. You and I worked on some iterations of that as well with the work you did with your former employer. We spent some time thinking about how to work with RIAs in the space, but ultimately determined that the best possible way is through 401(k). I still have my agency and I still do some business with high-net-worth individuals on a targeted set of solutions that fit for them and for their children. But most of my time is spent on what we've branded ALEXIncome.

We've designed what we see as the archetypal — or I should say, a good benchmark standard — for what DC retirement income should look like. I think there's room in the market for lots of different types of offering, and we can certainly talk about some of those, but much in the way that Vanguard and index funds set a benchmark, I think we've come up with something that serves as a very good benchmark there as well.

I also serve on the board of directors of Genworth Financial — large US life insurance company focusing on long-term care and private mortgage insurance — and has recently launched a business in care services, which we're very excited about. So that's me.

Paul Tyler (03:25) Ramsey, thank you for making time. You've played an important role in this industry. I think you're, again, sort of on the cutting edge of where guaranteed income may come from. We talked a couple of days ago — wow, a lot of events in the last two weeks. We had the IRI annual conference in Tampa. We had Limra Life and Annuities in Tampa. We had NAPA in Tampa. You were there. We thought it'd be a good opportunity to say, where does this opportunity stand?

I had a couple of really interesting conversations with people at IRI, and the question was: where do in-plan annuities sit in your strategy deck? And the answer was — everybody is thinking about it some way, somehow. How would you categorize where the industry is today?

Ramsey Smith (04:24) Everyone is thinking about it because they should be thinking about it. And I would argue that in the long run, they have to be thinking about it. The best thing that's going to happen to the insurance industry — certainly the life and annuity industry, and I would argue the asset management industry and 401(k) plan participants — is the ongoing development of this particular solution.

You can call it DC retirement income. Defined contribution retirement income. You can call it a guaranteed income solution. In 401(k) you can call it an in-plan annuity. All different ways of describing the same idea, which is to bridge the gap between the pension plan that our parents and grandparents had and cherished so much, and the savings plan that we've all been effectively granted — which has many merits but doesn't really solve all the real problems we all face once we go into decumulation.

It's a reasonably effective accumulation tool. It's not a great decumulation tool. And in-plan annuity solutions, especially if they're properly structured, help bridge that gap.

One of the things that I think would surprise a lot of people — we've done some pretty serious academic work to support this, and one of our peers has done so as well — is that an allocation to an annuity during the accumulation period actually a lot of the time leads to better accumulation outcomes. Because markets move up and down. Particularly if you happen to retire in 2008 or 2022, a year where stocks and bonds have both gone down. That's when it's most stark. But what you really see is that in the majority of outcomes — other than situations where stocks are just going straight up and interest rates are going straight down — that floor provided by the annuity allocation is actually quite effective in helping accumulation.

Going back to where you started — where's the world with this? There's some impatience in the market. We're all ambitious. Carriers are ambitious, traditional asset managers are ambitious, private credit managers are ambitious, recordkeepers are ambitious. We all want to grow our business. That's what we're paid to do.

This is a business that is developing slowly. First it was a regulatory framework that needed to come into place. SECURE 1.0 did that. SECURE 1.0 was swiftly followed by COVID-19, and I think that did a lot to slow down adoption. As we've come out of COVID, with SECURE 2.0 and increasing legislation supportive of guaranteed income and alternatives in 401(k), we're back on track. But it's a process that's going to take some time. And by the way, that's been the case for most good things that have happened in the market.

To give you some idea about where we are — there's a company called Sway Research that publishes research on adoption in this space. They will tell you that we're at about $140 billion in AUM. And one of the two market leaders at NAPA was saying they're up to $80 billion just by themselves. So that's real money. That's enough — in a market this size, with a TAM that depending on who you talk to is anywhere from $5 to $15 trillion — that's just a drop in the bucket. But certainly enough to set the ship sailing. And that's the critical piece.

We're seeing two clear market leaders, and we're seeing fast followers that are moving pretty decisively and making lots of hires. One player in this space made a LinkedIn post — the whole idea about the post was, the team is all together, we're happy to meet in our big New York office in this big conference room.

Paul Tyler (09:21) I think I know the post you're talking about.

Ramsey Smith (09:27) Most of the efforts I see in this space — it's one or two or three or four people, and it's one of many projects they're working on. But here is a market-leading carrier, asset manager — market leader in terms of assets, also historically at the cutting edge of new developments in our industry — they had an entire room full of people. And I keep seeing announcements every few weeks of somebody new they've brought on the team.

Add all those things up and it should be a pretty good wake-up call to anybody who's looking. So we've talked about a few things. One, it's a big total addressable market. Two, there are smart and large players moving forward, making meaningful investments and gathering assets.

But the other element that I think is super important is how important this is for the industry. We have an industry that is driven by a fantastic distribution force that goes out and evangelizes about the benefits of guaranteed income. It is not an inexpensive distribution channel. And the way the products are set up — typically every five, six, seven, eight years, products come out of surrender and they're either renewed for another commission or 1035'd to another carrier. That ongoing distribution cost affects the profitability of the business. That, plus competing over rates, pushes profitability pretty far out.

What's interesting about in-plan — and I don't think traditional distribution is going away, it's there for a reason — is that there's a place for different ways of acquiring guaranteed income. In the workplace, the interesting opportunity is to have a group annuity solution that's embedded in a target date fund. Part of the target date fund glide path. Based on your age, there's a formula that determines how much of your money goes into equities, bonds, and a guaranteed income solution — basically a group annuity. Or potentially something like a private credit sleeve. All those things, I think, are going to be part of our reality.

Paul Tyler (12:36) You know, this morning, Ramsey, I was out for a run. I was listening to an interview with Jensen Huang of NVIDIA. He talked about the layer cake in the AI market. And I thought, you know what, there actually is a layer cake here too. I was thinking about our podcast and this market. You've kind of hit on it — and I think you've alluded to all the layers. Regulation. Capital. Product. Service and technology. Distribution. And finally the customer. Maybe if we could go piece by piece.

Regulation — we talked about SECURE 1.0, 2.0. How about Trump accounts? This is interesting — kind of out of left field, not really connected, but kind of connected. How does that help or hurt the market you're in?

Ramsey Smith (13:43) I think it's very indirect in terms of how it helps practically. That money is for kids that are born. Even kids that are already too old — I think it starts with kids being born now. So we're all grandfathered out.

What I do think it reflects is a desire on the part of the government — whether it's the administration or Congress — to actually encourage people to save, give them incentives to save, and importantly, to educate our young on the importance of saving. So I think that's fantastic.

It's funny, I'm sitting here in my home office and I have my senior thesis. We went to the same undergrad, so you had to write one of those too, right? Or were you an engineer?

Paul Tyler (14:37) No, I had to write one. I won't make you read it.

Ramsey Smith (14:42) I won't make you read mine either. I wrote my senior thesis in 1990. I was a French major — we didn't really have minors, but if I had a minor it would have been in economics. I wrote my senior thesis on the social security system in France. It's got similarities and differences with the system here, and a lot of the same problems. The aging population problem was there in the '80s. So much of what we talk about today is not brand new — it's been in the zeitgeist for many years.

One of the things I talked about there was the potential for having a funded social security system as opposed to a pay-as-you-go social security system. I think for a lot of reasons that's not entirely practical right now. But in principle, efforts like 401(k), efforts like Trump accounts, are useful in that direction.

Paul Tyler (15:48) One quick way to get to that five-to-fifteen-trillion-dollar market would be if Congress just mandated. Right now it's an opt-out option when you do a 401(k). If we were to set up a Polymarket bet — will the federal government in the next three years mandate this thing — where would you put the odds? Above 50, below 50?

Ramsey Smith (16:28) I'd say below 50. There are different types of mandates. One mandate is: you have to opt out. Another is — and I don't have a lot of familiarity with the Australian superannuation system, but my high-level understanding is it's completely mandatory. Some portion of your salary has to be put into these investment funds. I don't even know if you can opt out. Those are sort of the different layers.

The most we could expect here is maybe a situation where you're automatically opted in and you have to opt out. But what it still comes down to is: what is the default? If you're auto-enrolled, you're defaulted into something. And what are you defaulted into?

For most people, as a practical matter, in their 401(k) plans, they're defaulted into a typical target date fund — stocks and bonds, with the allocation higher to equities and lower to bonds earlier in life, and higher to bonds later. Our role as ALEXIncome — and the role of all our peers — is we want to be that default. Maybe we're providing the perfect group annuity into an existing strategy. Maybe we're actually providing the whole platform — bringing in the right set of carriers, the right asset manager, glide path manager, recordkeepers — having a complete turnkey default solution.

For us, the critical thing for anybody who wants to be successful in this space is: when there's a default available, you want to be the default. Because it's very hard to get people, once they're in a strategy in a 401(k), to move out. And it's not necessarily related to financial sophistication. If you're not super financially sophisticated and you have maybe a small balance, you might say, "my employer has been very thoughtful about this, so I'm going to trust what my employer chose." That's actually a reasonable approach, and frankly an approach we count on people relying on.

The next group are people who are smart, rich, whatever — a lot of them are doing their most creative things in their brokerage account, and their 401(k) is a bit of an afterthought. So they too just leave it in the default. Being the default is critical.

So the first question is: can we make the default a more common thing? Can we make more people actually be subject to a default — be opted in automatically? Yes. The second question is: what are they opted into? We think they should be opted into a solution that includes guaranteed income, and we believe we have the best solution for that.

Paul Tyler (19:29) All right, you and I are going to start a Polymarket. I don't know how you create a market on Polymarket. We'll get our listeners to put their money where their mouth is.

Next level up — capital. You talked about some of the capital is already coming in. If I were a large asset manager, I could look at this as a defensive measure. If I'm a carrier, maybe look at it as an offensive measure. What does the capital look like today? How much of this is trying to keep what I've already got versus seeing this as an opportunity to grow my book of business?

Ramsey Smith (20:03) That is a fantastic question. If you're a traditional asset manager, you could be in one of two camps. If you're one of the big three or four that have really dominant market share in this space, then I would argue it's somewhat defensive — you're trying to figure out, all right, this may eat my lunch a little bit. So I either have to grow the pie more than my lunch gets eaten, or I need to find different coupons to clip within the context of this new business.

For asset managers that are already pretty big in the target date fund space, the solutions they tend to come up with are ones that are less threatening to their existing business. But there's a long tail of asset managers that don't have meaningful market share in target date funds. For those — or want-to-be target date fund managers — this is actually a great opportunity to do something differentiated and try to get back some of the market share that's been collected with a relatively small handful of players.

It's especially important for carriers — and my partner Graham and I think very much along the same lines here — it's a generational opportunity to take back a position that, as an industry, was relinquished. If you went back far enough, target date funds weren't the dominant default. The dominant default were stable value funds and GICs and other basically insurance products. Insurance companies ruled the roost in 401(k) at one point. But that's not the case anymore. And so now there's actually something that's becoming part of the zeitgeist — what people want — that plays very much to your strengths. It's something only a life insurance industry can do — provide those guarantees.

I would like to see carriers play as much of a leadership role as possible in this space. But my sense is, on balance, many carriers take a look and see the marketing advantage asset managers have, and tend to want to work with asset managers that already have the call into these places.

Paul Tyler (22:52) For a big asset manager, this might look like a rounding error. For a lot of the carriers we work with, this is the next, as you say, generational opportunity to grow their balance sheet — in a safer, faster way than they ever could with traditional annuity design.

You hit on this — I know you have some strong opinions on what the product should look like. Let's talk about the competing models, and then what is the product you're advocating for?

Ramsey Smith (23:19) I want to back up just a little, on the capital issue. Earlier I talked about what it costs to distribute annuities right now. It manifests itself in two ways. One, the actual real commission cost. Two, because of commission costs, there's additional capital strain — additional capital that needs to come into the product. Some of that you get back after a year or two, but if you're growing your business and you're selling more product, then basically that capital, until you're going to run off, is always like a few steps away.

What are insurance companies really good at? Underwriting risk, but also being asset managers — asset liability management, credit evaluation, making decisions based on where interest rates are going to go. Really valuable and meaningful skills. Like any asset manager, the longer you can hang on to the money, the more value you can create. You can collect the liquidity premium.

If you're selling a product that rolls over every five or seven years and has fairly high frictional cost, you can buy assets that go out five or seven years. That's fine — there's plenty available. But maybe some of the assets that might generate more alpha, more excess return, are further out — seven, ten, fifteen, twenty years.

Here's an important difference with a group annuity in a 401(k): there's new money coming in every month. And most people don't switch out of the strategy they've been given. They're likely to hold that money in their account until retirement. So now you're looking at something that costs less to accumulate from a carrier balance sheet perspective, and has a longer duration. It's much stickier.

And there's another important issue. The entire 401(k) system is built around the concept that at 65, we cash out — roll over to an IRA at one of two or three obvious players, or we cash out and do something else. The concept of staying in plan — staying in the same plan — is not necessarily what either plan participants or even plan sponsors have been set up or trained to do. But if they were — and I think this is part of the potential here — if you have a strategy that takes you not just to retirement, but through retirement, now you're in a position where that stickiness keeps those assets and lets you invest profitably even longer.

From the plan sponsor's perspective, they're able to amortize their cost of running the plan over a larger number of participants. From the participant's perspective, they're probably able to keep an institutional fee load on their portfolio. What ends up happening today is — you're in a 401(k), it's generally a pretty low-cost solution. You flip over and do an IRA rollover to any sort of advisor, and — many advisors do incredible work, there's a lot of really important things being done, everything from managing participant psychology to estate planning — but not always. For a number of participants, it makes sense just to stay in plan. It's much more cost effective. And again, if there's an income solution built in, and maybe even some advisory solutions built in, I think it's a better deal for the participant and the plan sponsor.

Carriers and asset managers that were in the plan get to keep the assets a lot longer.

Paul Tyler (28:08) Yeah, you bridged it over, which is great. I love that — we're not taking it to retirement, we're taking it through retirement. There've been discussions before — how do you get those values ported into your 401(k)? How portable is that annuity afterwards? Where are we in maturity? We know that the team at Micruity, SS&C — they have some good solutions. Are we ready? If suddenly the government says you must default into this option, or employers start to default employees into the option on their own, are we ready?

Ramsey Smith (28:32) I'm going to separate those two issues. Under the current paradigm, there's the issue of transferring information daily to make sure everybody's accounts are where they need to be. I'm not a technologist, so I don't want to say... I understand it is doable. It's also not non-trivial — which is why the companies you named have played a very important role. Somebody at NAPA described it as the interstitial fluid between the various vendors in a 401(k) space.

I think the portability issue remains somewhat aspirational. But I would argue that the best way to get to portability is to have this uniform — make the products as uniform as possible. I never felt like the broad constraint in this business was creativity and innovation on the type of product. I always thought it was capital and simplicity.

In order to meet the theoretical need of the entire nation — if everybody tomorrow was defaulted into an in-plan solution — the insurance industry balance sheet would have to grow dramatically. It would have to bring in more capital. And it would have to have as much risk management flexibility as possible.

I didn't really mention this — I said I was a former investment banker. I spent 21 years at Goldman Sachs. Ten or fifteen of those years, I was helping life insurance companies manage risk in variable annuities and fixed index annuities. By the time we got involved, it was usually because there was a risk management problem. Things were easy because there was natural diversification in the book. And then suddenly things started to stick out, and it was our job to help hammer down those problems. Usually it ended up being some pocket of risk — some certain type of equity risk, commodity risk, sector of the interest rate curve, credit exposure in one particular industry. Anytime you get creative and find really interesting alpha-generating risks, those work for a while. And then you get to a certain size and whatever alpha was there is gone, and it just becomes pure risk.

So we've designed a solution. It's a simple fixed deferred solution with a crediting rate that resets every year. We've made it as simple as possible so that any carrier should be able to write this. If you're a life and annuity carrier and you have a license and you're open for business, you should be able to write this style of product. It's basically a simple fixed annuity.

In a world where everybody is largely selling that basic framework, you can see an easier path towards portability than one where somebody's got a variable annuity structure, another's got an FIA-related structure, another has fixed deferred. And by the way, of the $140 billion of AUM so far, by far the winning strategy are ones that are fixed deferred. By far.

Paul Tyler (32:39) Interesting.

Ramsey Smith (32:41) Yeah. So our thesis is being borne out by who the early winners are. They're not all exactly the same — we have thoughts and quibbles about approaches — but fundamentally, fixed deferred is on top so far.

Paul Tyler (32:46) Last question — and this is the hard one. Let's assume the government doesn't come in, employers don't default. How do you bring distributors together with the clients — the participants — to make that decision? Typically, when I've participated in a 401(k), when do I touch it? When I join the company. Every once in a while I get an email or something on a portal, offering a webinar on planning for something. I'd never gone to one of those, which I'm presuming a lot of people in these 401(k) plans haven't either. How do you get the message out that you should opt into this and select this annuity?

Ramsey Smith (33:43) A few things. The best screens are institutional screens — at the plan sponsor level for larger plans. For small and medium-sized plans, it's an advisor. There are dedicated advisors that just do this kind of work. And the kind of people we get to meet at a conference like NAPA — National Association of Plan Advisors — are RIAs that do this as some portion of their business. Some make this a larger part of their business, some do it as a small service for their private clients, and there's some in between. Plus consultants for the larger plan sponsors.

If you try to educate every single person at the participant level before they opt in, that'll be decades before we accomplish that. People will be retired and they won't have been able to solve the problem we were trying to fix in the first place. So I think the decision should be made by entities or advisors that are best equipped to act as fiduciaries and make a decision on behalf of their plan participants.

Then you educate. We're very close to and collaborate with folks in the space that have actually launched these programs. They will describe to you twelve sessions over the course of a career to explain what you have and why you have it. You can't force people to come to those, but here's the thing — just like Social Security, just like pension plans, which people didn't entirely understand the inner workings of. They knew at retirement this check is coming. That's the proof in the pudding. You set people up to receive the check, and you explain why it's so valuable.

Maybe it's a little reverse order. But I think the other way is trying to boil the ocean.

Paul Tyler (36:19) I agree. That's why you need good plan sponsors, good advisors to plans. Forward-looking sponsors who are encouraging and helping employees do the right thing for themselves and their long-term retirement plans.

Ramsey, we're right at the top of our time. I love what you're doing — I love the passion, the energy, the commitment. You guys are doing a phenomenal job. What's the best way for people to find you, reach you, talk more about the products and what you could possibly do for them?

Ramsey Smith (36:59) If you're a plan sponsor, we'd love to talk to more plan sponsors. We've got a great dialogue with carriers and asset managers — not that we can't always use more, but we're reaching out and getting a lot of great conversations. I really want to make sure we get the opportunity to speak to plan sponsors and to RIAs in this particular business.

Ramsey — R-A-M-S-E-Y — at alexincome.com is a very easy way to get to me. Graham@alexincome.com is my business partner. We're very happy to chat.

Paul Tyler (37:43) Excellent. Ramsey, this was great as usual. Thanks for the time, and thanks to our listeners. Please share this with your friends and be sure to come back next week for another great episode of the L&A Hub. Thanks.

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