Now that the SECURE Act has become law, many within the industry are curious to see if it will lead to widespread use of annuities in retirement plans.
Ben Norquist of Convergent Retirement Plan Solutions, said that's a definite maybe.
Speaking during a webinar sponsored by the LIMRA Secure Retirement Institute, Norquist said the fiduciary liabilities for plan sponsors could be a sticking point.
"I don't feel like I have a solid grasp yet on the extent to which the plan sponsor community at the end of the day 5, 10, 15 years from now is going to fully embrace a role that keeps them in a in a fiduciary capacity through retirement," he said. "Obviously some will, and maybe it'll turn the corner where it just becomes the norm."
But first, there will likely be a long evolution phase that includes more simplified products and further clarification of compensation issues in the various distribution channels, Norquist added.
"I wouldn't be surprised if we see more legislative action in the future to promote the use of annuitized retirement income," he said. "I think in some European countries there's even situations where you default into an annuitized form of payment, but you can opt-out under certain circumstances. I don't think we're there yet."
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was included in the massive $1.4 trillion spending bill signed by President Donald Trump at the end of the year.
Just getting the rules loosened for annuities in plans is "a big win for the insurance industry," Norquist said.
'Remains To Be Seen'
While companies already can offer annuities in their 401(k) lineups, just 9% do, according to the Plan Sponsor Council of America. The SECURE Act aims to boost that figure, and improve retirement readiness, by eliminating companies’ fear of legal liability if the annuity provider fails or otherwise fails to deliver.
The act creates a safe harbor that employers can use when choosing a group annuity to include as an investment within a defined-contribution plan, with new provider-selection rules, writes Stephen Miller for the Society of Human Resource Management:
For instance, the legislation will protect employers from liability if they select an annuity provider that, among other requirements, for the preceding seven years has:
- Been licensed by the state insurance commissioner to offer guaranteed retirement income contracts.
- Filed audited financial statements in accordance with state laws.
- Maintained reserves that satisfy all the statutory requirements of all states where the annuity provider does business.
"It requires that they select a financially capable provider, but allows basically the employer to rely on documentation provided by the provider," Norquist said.
The plan sponsor does have to do a cost-benefit analysis, he added. That does not mean finding the lowest-cost products.
"Are we going to see a flood of plan sponsors looking to embrace lifetime income products?" Norquist asked. "I think it remains to be seen. I think a lot of carriers are hoping for that. To a certain extent, I think some of the lifetime income solutions are historically at least more of a push by the financial services industry than a pull by the plan sponsor community.
"That doesn't mean that they won't ultimately be embraced and become widespread. But to me, the verdict is still out."
Parsing The Bill
The SECURE Act is "the most significant retirement reform since the Pension Protection Act of 2006," Norquist said. The legislation contains a grab bag of changes across the retirement planning spectrum. Other big changes include:
-- More time in IRAs and 401(k)s. The bill raises the age for required minimum distributions (RMDs) from 70 1/2 to 72 years old.
-- Grant older workers benefits. As long as you're working, you can still contribute to your IRA after age 70 1/2. Previously, you couldn't.
-- Boost small-business 401(k)s. Small businesses can now band together in group plans.
-- 529 plans. They can be used to repay up to $10,000 in student loans, as well as for siblings.
The law also enhances automatic enrollment and auto-escalation, allowing companies to enroll employees automatically into a retirement plan at a 6% rate of salary contribution, up from 3%.
Employers can now raise employee contributions to a maximum of 15% of annual pay. Workers can opt out of these features at any time.
A final positive: The SECURE Act would allow investors early access to IRA funds for any "qualified birth or adoption" by creating a new exception to the 10% penalty.
However, the money is still subject to tax. The $5,000 amount is the lifetime limit, and applies to any distribution from the retirement account within one year from the date of birth or legal adoption. The exception applies to children under age 18, or physically or mentally disabled and incapable of self-support.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.
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