Opening the Gate for Annuities in 401(k) Plans
One of the most important changes in the SECURE Act is removing a major stumbling block to offering annuities in 401(k) plans.
Only about 10 percent of 401(k) plans currently offer an annuity as an investment option. One of the main reasons for the reluctance to offer annuities is the potential fiduciary liability if the provider becomes insolvent, which may occur many years after the provider is selected.
The SECURE Act provides for a safe harbor that relieves plan fiduciaries of potential liability in regards to selection of annuity provider. This does not excuse plan fiduciaries from making a prudent and well considered decision in the initial selection and monitoring the provider ongoing. Additional guidance will be issued by the Department of Labor regarding the requirements to gain such protection.
The upside to including annuities in 401(k) plans is this offers participants an investment option that will provide a steady stream of income in retirement. This has become a greater concern in recent years as the American population ages and plan participants move from the accumulation phase into retirement. The concern is that annuities are complex and expensive, and the fees can be difficult for the average investor to discern.
Notwithstanding the potential complexities of annuities, participants who decide to invest in an annuity will probably be better off if the plan fiduciaries select the annuity provider, as opposed to participants rolling their account to a brokerage firm and then purchasing an annuity which frequently occurs under current law.
The SECURE Act makes a second important accommodation for offering annuities in plans. Where a plan sponsor eliminates a lifetime income option, the Act permits individuals to transfer this investment to another plan or to an IRA.
Lifetime Income Disclosure Now Required
At present a few record keepers include on participant statements an estimate of the monthly income a participant’s account might generate. Often this estimate is based on a projected account balance at retirement.
The SECURE Act requires an annual disclosure on participant statements of the estimated monthly income a participant’s accrued benefit might produce in the form of a either a single life annuity or, if married, a joint life annuity.
The Department of Labor is directed to develop standards for making lifetime income projections. The Department has a year to develop these standards. This notice does not have to be provided to participants until after these standards are published.