Annuities are coming to 401(k)s

The SECURE ACT provided a gateway to get annuities into 401(k)s, and many plans could begin to incorporate those insurance products as soon as this year. The new, wide-ranging legislation will lead to substantial changes in the private sector retirement savings system, including several provisions that could affect how workers view retirement income and annuities.

FYI: You do not need to have a 401k to have a tax deferred annuity. They are available to anyone who qualifies.

Currently, annuities are seldom included as options within 401(k)s. Most people do not realize the same tax advantages of 401k's also applies to dollars rolled into an annuity. With RMD's (required minimum distribution) being moved back to 72 from 70½ (applicable to those individuals who turn 70½ after December 31, 2019) is also an advantage for retirement planning with the new Secure Act.

The new law will lead over time to an enormous amount of annuities included as common practice instead of being the anomaly and make it easier for plan sponsors to add annuities to their plan menus. Under the SECURE Act, in-plan annuities are portable, as 401(k), 457 and 403(b) plans can make distributions between trustees after a participant leaves an employer for a new job. The new rules also help shield plan sponsors from lawsuits by providing a so-called “safe harbor” for their selection of annuity providers. Litigation is a major concern for employer-sponsored retirement plans, and a lack of clarity on the factors sponsors must consider in choosing insurers and their products has kept annuities from being widely used in DC (defined-contribution) plans for years, the insurance industry has contended.

One requirement in the new law could encourage savers to give more consideration to annuities. 

Annual 401(k) statements will be required to show an estimate of a participant’s monthly income in retirement if their projected balances were used to buy an annuity.
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​That aspect of the law will not become effective until the Department of Labor passes a regulation outlining how the retirement income disclosures must be presented.

With an increased focus on people spending down their assets, one of the issues a participant may face is how are they going to figure out the right allocation to make to a guaranteed-income product.

One option could automatically shift a participant’s assets from target-date funds to managed accounts over time. The managed accounts allow allocations to annuities. Participants will certainly need guidance on how to start withdrawing their account balances and may have a hard time making the mental shift to start spending down their plan [assets].

Once plan participants retire, they can take a distribution from their accounts or roll their assets into an IRA but after that, many people leave the money untouched until they hit the age at which they’re required to start taking distributions.

There’s a lot more opportunity to help participants through the experience and many people say...

they really love the idea of guaranteed income, but they don’t love the idea of annuities.

This usually comes from a complete lack of understanding of how annuities work and how beneficial they can be in the right situation.

Once participants begin seeing retirement income estimates on their statements, that could change their savings habits and make them more open to the idea of insurance products. In addition to lifetime income annuities, plans will likely also consider fixed indexed annuities and structured annuities.

For employers, adding retirement income options to plans makes sense, both from a practical and freedom to choose standpoint. The first companies to begin adding annuities to their plans will likely be large firms that have long-tenured and highly compensated employees. One of the problems that employers might face is when their employees get to retirement age, if they don’t feel ready to retire, they won’t. By addressing retirement income, a business will be able to manage their workforce more effectively.

An annuity option will be extremely beneficial to both the employer and employee.