Demand for annuities within employer-sponsored retirement plans will “grow exponentially” in the next two years, according to a new report from LIMRA.
The Windsor, Conn.-based financial research organization anticipates “greater adoption of in-plan guarantees in late 2023 and 2024,” a press release said, referring to annuities’ contracted income payouts.
If true, that would be a big change. LIMRA acknowledged that just 14% of defined-contribution plans currently offer annuities with income guarantees. That’s despite the fact that some 70% of workers say they want the sort of guarantees that only annuities can offer to be available in their retirement plans.
Including annuities as an option in 401(k)s and other employer-sponsored retirement plans has been discussed for years. Supporters say that annuities offer many benefits that retirement savers want and need, including guaranteed income, which some describe as a “personal pension.” But detractors argue that annuities are often too complicated for plan sponsors and employees to understand, let alone to compare so they can select the best options. Furthermore, should an annuity provider become bankrupt or otherwise fail to provide promised benefits, employers fear being liable under their fiduciary obligations.
So why does LIMRA think the market is about to explode? The press release credits the SECURE Act 2.0, which President Biden signed into law at the end of last year. But a close analysis indicates that the true driver of in-plan annuity demand is more likely the first SECURE Act signed by President Trump in December 2019.
The earlier legislation, officially called the Setting Every Community Up for Retirement Enhancement Act, was designed to help working Americans save for retirement. It increased access to tax-advantaged retirement accounts in a number of ways. It also cleared several important obstacles for in-plan annuities.
First, the original SECURE Act expanded so-called safe harbor protections so that retirement plan sponsors could offer annuities without fear of being held legally responsible for them as part of their fiduciary obligations. Second, it allowed workers who change jobs to keep their annuity guarantees without incurring early surrender penalties.
Last year’s legislative sequel furthered the goal of increasing access to retirement accounts. But it said very little about annuities—with two notable exceptions.
Section 201 of the SECURE Act 2.0 removed the required minimum distribution (RMD) hurdles that were limiting the availability of certain lifetime annuities from qualified plans and IRAs. Specifically, this referred to annuity contracts that offered payout increases over time or return-of-premium death benefits, items barred from qualified plans under previous law (likely because lawmakers wanted to limit contract holders’ greater ability to defer taxes). The new rule deemed these constraints to be unfair. “Without these types of guarantees, many individuals are unwilling to elect a life annuity under a defined contribution plan or IRA,” said the official SECURE Act 2.0 summary. Consequently, this restriction no longer holds.
Section 202 of the SECURE Act 2.0 increased the amount that can be taken out of a retirement account and used to purchase a qualified longevity annuity contract (QLAC). QLACs are a type of deferred annuity exempt from RMDs until distributions are taken. Under the old rules, you could only use 25% of a retirement account, or $135,000—whichever was less—to purchase a QLAC. The new rule raises the limit on these purchases to $200,000.
“The feeling in the industry is that near the end of 2023 and going into 2024, we’ll see greater adoption of in-plan annuities from the larger plans, and eventually the smaller plans will follow after that,” said Bryan Hodgens, head of LIMRA distribution and annuity research, in a statement.
Of course, that may just be wishful thinking. Hodgens conceded that getting retirement plan administrators and their advisors comfortable with in-plan annuities is “critical to success.”
Plan advisors need more knowledge about annuity options, according to LIMRA research. Three in 10 of these advisors believe guaranteed income solutions like annuities need greater clarity for their clients to understand them better, the LIMRA statement said.
Hodgens added that the annuity industry should first focus on financial advisors, since they set up 93% of defined-contribution plans.
“While the need and interest are great, insurance companies still need to figure out how to explain the value of these products to several audiences—plan sponsors, participants, advisors, and consultants—to improve awareness and effect higher adoption rates,” he said.
The LIMRA report urged annuity and retirement professionals to “provide effective education to all parties involved,” saying that the current moment is an opportunity to give more Americans access to “pension-like income.”