Implications of in-service rollovers on in-plan income adoption

The recently proposed Retirement Simplicity and Clarity Act would expand in-service rollovers to include annuities. In-service rollovers currently provide active employees with the ability to move funds from a defined contribution plan (e.g., 401(k) plan) into an individual retirement account without needing to leave their current employment.

The proposed expansion would allow employees to contribute a portion of their defined contribution plan assets into an out-of-plan annuity to provide guaranteed income. Although the proposed legislation is still in committee, this would significantly impact in-plan income adoption for asset managers, carriers and plan sponsors.

Assessing the impact of in-service rollovers

For many in-plan income providers, adoption strategies hinge on three specific actions.

• Drive plan sponsors to provide in-plan income solutions to their plan participants
• Include in-plan income solutions as a part of a target-date fund
• Push for auto-enrollment (and potentially auto-escalation) within defined contribution plans

This strategy promotes a slow but steady approach to getting in-plan income solutions to plan participants who are seeking guaranteed income solutions. As individuals auto-enroll and make contributions into plans with these in-plan income options, assets will gradually grow.

To be sure, in-service rollovers will not eliminate existing adoption strategies. As proposed, in-service rollovers would only be applicable for participants that are ages 50 and older and would only work for individual retirement annuities as defined by 408(b) of the Internal Revenue Code. Plan sponsor and participant preferences also continue to support broader in-plan income solution adoption.

Plan participants have stated that they prefer making smaller payroll deductions to fund an annuity than making a lump-sum contribution to do so. This favors in-plan income options over out-of-plan rollovers. And plan sponsors may prefer to keep assets managed within the plan.

But in-service rollovers could be attractive to plan participants who want greater choice in how they annuitize a portion of or all of their retirement assets than what their current plan offers. For example, a plan participant with an employer that offers an in-plan income option might not choose an annuity/long-term care hybrid product.

Another key challenge is that in-plan adoption is currently low – only about 10% of plan sponsors even offer an in-plan income solution. Although a plan needs to enable the in-service rollover feature, this solution does not require plan sponsors to engage in the education and selection of products within existing defined contribution plans in the same way they would need to with an in-plan solution. That poses a challenge to drive broader adoption of in-plan solutions. Even where there is adoption, income providers may battle for asset retention as assets are rolled out of plan elsewhere.

Key opportunities

Despite possible challenges to the existing adoption strategies, this presents an opportunity to add an additional method for driving guaranteed income adoption and sales. To capitalize on this opportunity, in-plan income providers should evaluate four key actions:

1. Focus on plan design – In-service rollovers provide an opportunity for plan participants to convert savings into guaranteed income, but only if the plan has the capability to facilitate in-service rollovers. Plan sponsors may be more willing to encourage rollovers, especially if safe harbor provisions reduce the litigation risk that currently impedes broader in-plan income adoption.
2. Develop a channel strategy – The introduction of in-service rollovers to annuities will not end in-plan income adoption. Instead, it will force guaranteed income providers to develop a comprehensive sales channel strategy. For example, if in-service rollovers to annuities are only available to those 50 and older, there should be incentives and rewards for asset attention and focus on accumulation, particularly for younger plan participants (e.g., crediting bonus).
3. Invest in financial advisor relationships – One of the key challenges for driving in-plan income adoption is educating the plan participant. Historically, annuities have been sold primarily through financial advisors, who can provide the expertise to help customers make the right decision. The opportunity for in-service rollovers strengthens the need for partnership between in-plan income providers and financial advisers.
4. Evaluate product development – In-plan income solutions must be designed with both the plan sponsor and plan participants in mind. This can be a challenge since plan participant demographics vary significantly within plans, particularly for large and mega-size plan sponsors. The introduction of in-service rollovers could cause income providers to reconsider their strategy.

The proposed legislation still has significant hurdles to overcome before it is law, and it may never make it out of committee. But the momentum to address income challenges for retirees and the potential impact of in-service rollovers to the in-plan income market should have all retirement stakeholders watching closely. In-plan income providers should evaluate how their go-to market strategies would change if in-service rollovers to annuities becomes possible.

© Entire contents copyright 2025 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.