By Kevin Walsh and Thomas Roberts
The SECURE Act includes three significant provisions relating to lifetime income. These new provisions have the potential to both fundamentally reframe how participants view their accumulated 401(k) plan savings, and to generate an increasing level of participant interest in gaining “in-plan” access to lifetime income products.
To complement this increased interest, the act furnishes plan fiduciaries with a safe harbor to facilitate their selection of in-plan lifetime income products. As a reminder, an annuity is an insurance product that includes guaranteed lifetime income protections. Annuity products vary considerably in their approach to providing lifetime income, ranging from relatively simple payout products that pay a fixed amount annually to more complex insured accumulation arrangements.
For many years, retirement policymakers have expressed concern over the “illusion of wealth” that may adversely affect 401(k) plan participant outcomes. Plan participants may accumulate an account balance that appears impressively large but may nonetheless be woefully insufficient to carry them through retirement.
The SECURE Act adds a new required disclosure that defined contribution plan participants must receive at least annually. The new disclosure will illustrate the income stream that the participant’s accumulated account balance would be able to purchase, both in the form of a qualified joint and survivor annuity (assuming the participant has a spouse of equal age) and as a single life annuity.
The provision requires the Department of Labor to issue a model disclosure and to provide a set of assumptions that plans may rely upon for purposes of generating the illustrations. Plan administrators that use the DOL’s assumptions to produce the illustrations are relieved of any liability in the event that participants’ actual benefits fall short of those illustrated. As participants begin to think about their 401(k) balances differently, there is likely to be an increasing level of interest in gaining in-plan access to lifetime income.
Decreased Fiduciary Risk?
Historically, convincing a plan fiduciary to add an annuity feature has been a difficult thing to ask. Fiduciaries have worried about the potential for personal liability when considering adding annuities. If the selected insurance company were to experience financial distress, there is a potential for claims alleging that the carrier was imprudently selected and to seek recovery of losses, even if the event were to occur years down the road.
The SECURE Act provides fiduciaries with a greater measure of confidence when selecting insurers by making an optional safe harbor available. Under the safe harbor, plan fiduciaries are deemed to have satisfied the Employee Retirement Income Security Act’s prudence requirement if they engage in certain activities. Those activities include conducting an objective, thorough and analytical search that considers the insurer’s financial capability to satisfy its obligations, as well as the cost of the annuity offered in relation to the annuity’s benefits and features. On the basis of these considerations, plan fiduciaries must conclude that the insurer is financially capable of satisfying its obligations under the annuity and that the cost of the contract is reasonable.
Most important, the safe harbor includes a list of representations that insurers may provide to fiduciaries which, if given, would satisfy the requirement that the fiduciary has considered the insurer’s financial capability. Separately, the safe harbor provides that reasonable cost does not necessarily mean lowest cost. With the addition of this safe harbor, fiduciaries may become more comfortable offering insured lifetime income products in plan.
Easier For Participants To Keep?
Lastly, the SECURE Act provides a solution to the vexing problem of administering and preserving lifetime income products accumulated in-plan following a change in providers. The SECURE Act provides that plans may allow for trustee-to-trustee transfers or distributions of accumulated lifetime income benefits, including to an individual retirement account, following a change of providers even though the participant would not otherwise be eligible for a distribution.
Kevin Walsh is principal with Groom Law Group in Washington. He advises clients on a wide range of fiduciary matters and other issues involving benefit plans. He may be contacted at [email protected].
Thomas Roberts is principal with Groom Law Group in Washington. He has more than 25 years of experience in advising insurance and annuity providers, banks, and other financial institutions on ERISA fiduciary and related legal matters involving retirement product and service offerings. He may be contacted at [email protected].
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