By Tamiko Toland
Let’s talk about the SECURE Act. I don’t mean the provisions of the act themselves, but how it is possible that the act may increase annuity sales outside of retirement plans.
In fact, one-third (35%) of financial professionals surveyed thought that clients will be more receptive to annuities because of the SECURE Act. And one-quarter (27%) thought it would lead to an increase in annuity sales. Their clients are even more enthusiastic; nearly half (46%) of consumers said they would be more interested in buying a guaranteed income product if one were available within their retirement plans.
These questions, which were part of the 2020 Guaranteed Lifetime Income Study by Greenwald & Associates and CANNEX, shed light on the unexpected consequences of legislation that focuses on employer-sponsored retirement plans. At first blush, it may seem like there is no relationship between that and retail sales. However, the SECURE Act does two things in particular that we feel could affect how clients perceive annuities and how clients can embrace annuities as part of their personal retirement plan solutions.
Establishment Of Safe Harbor
For one, the SECURE Act establishes a safe harbor for the selection of guaranteed lifetime income contracts. This means that it is much easier for plan sponsors to add these options to their plans and we certainly hope that this will happen more frequently.
We don’t expect a tsunami of employers rushing to add annuities to their plans, but even if adoption is slow, there is a secondary benefit of focusing attention on annuities. The SECURE Act’s emphasis on annuities in itself validates their role in increasing retirement security. After all, it was important enough for the Department of Labor to expand its regulations specifically to increase worker access to these products
Plus, the safe harbor itself shows that employers (and, by association, their employees) can trust companies that meet certain criteria, validating the product. We believe that the SECURE Act’s safe harbor helps allay concerns about the financial security of the companies issuing annuities.
Disclosure Of A Lifetime Income Stream
Another requirement under the SECURE Act is the disclosure of how much income from a life annuity a worker would get from the current account balance. This provision takes steps to help savers understand how accumulated savings translate into a regular guaranteed payment. For one thing, this addresses the psychological barrier clients face when handing over a very large sum of money in exchange for much smaller checks.
But it turns out that investors want to know this, too. After all, it is not an intuitive calculation yet it is critical to paint a basic picture of what life in retirement will look like. In the study, half (52%) of preretirees thought that an estimate of future income would be more valuable than estimates of either expenses in retirement or how much to save.
What does this have to do with financial professionals? First of all, clients will be seeing income estimates at least once a year on their 401(k) statements and may expect the same from their advisors. Personally, I see this as a virtuous circle that could finally help orient people to the idea of future income and give them a feel for how savings will eventually translate into a regular check.
Second, many of those who haven’t been getting an estimate may not know what they’re missing — yet. Among those who saw an income estimate, 80% thought it was very helpful. By contrast, among those who hadn’t seen an income estimate, only 52% agreed. If you don’t think your clients care about this calculation, you could be very wrong.
Filling In The Gaps
Guaranteed income options within defined contribution plans are still few and far between. Although the SECURE Act is intended to move the needle to increase retirement security, many workers realistically will not have access to workplace annuities in the near future. This doesn’t make it any less important an issue for retirement planning.
For financial professionals, the SECURE Act creates a prime opportunity to ask clients whether they already have access to guaranteed lifetime income through their employer plans. Best of all, based on the rationale I’ve laid out, this study suggests there is reason to believe clients may be more receptive to the concept than ever, especially if they are not getting it at the workplace.
Today, there is a growing opportunity for financial professionals to step up to the plate with more solutions that meet retirement income planning needs. Proper client education on how these solutions work is the cornerstone to the trust and confidence they need to commit to a plan. This has not changed, but I see that the SECURE Act provides a nudge in the right direction with the new annuity disclosure.
After all, the income guarantee is designed to help replace a paycheck, since most will not be satisfied living off of the income from Social Security alone. It turns out that the SECURE Act may also pave the way to use workplace savings as the jumping-off point for this conversation.
Tamiko Toland is head of annuity research for CANNEX, which provides data and analysis on annuities. Her focus is the individual and institutional U.S. annuity market. She may be contacted at [email protected].
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