Last May, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act by a whopping 417 to 3. If it passes in the Senate (as of press time, this was expected to happen by the end of 2019), many annuity providers will be celebrating.
Kathleen Coulombe, vice president of retirement security and federal relations at the Washington, D.C.-based American Council of Life Insurers, said the law makes it easier for employers to offer annuities with lifetime guaranteed income streams within their retirement plans.
That’s sometimes been a controversial topic. “At present, employers must either hire a costly financial expert to audit an annuity provider’s books or figure out for themselves whether an insurer can deliver on its promises,” Coulombe says. “What’s new in SECURE is that employers will be able to rely on the experts—i.e., state insurance departments—to ensure that life insurers will be there now and in the future.”
Some observers have worried that employees might be lured into expensive annuity contracts that aren’t in their best interest. But Paul Richman, chief government and political affairs officer at the Insured Retirement Institute in Washington, D.C., doesn’t see that. “There is no diminishment of plan sponsors’ existing fiduciary responsibilities [to protect employees],” he says.
Elsewhere, the SECURE Act extends “safe harbor” protections for plan sponsors when they select annuities, reducing their potential liability even if the insurer defaults.
Furthermore, the law doesn’t require workers to choose the products. “By including annuities as an option, plan sponsors are helping employees protect a portion of their portfolio with guaranteed lifetime income, while continuing to accumulate and grow savings through other parts of the 401(k),” says Cyrus Bamji, head of communications at the Washington, D.C.-based Alliance for Lifetime Income.
The new law also answers concerns about portability—what happens when workers change jobs. Under current law, plan sponsors might worry that participants will lose lifetime income guarantees if they move elsewhere, says Carol McClarnon, a partner at Eversheds Sutherland, a Washington, D.C.-based law firm.
The SECURE Act, on the other hand, specifically allows direct transfers from one retirement plan to another, preserving participants’ investments and avoiding surrender charges and fees, McClarnon explains.
Critics say that many annuities are not made for ongoing contributions as 401(k)s are. But annuity proponents like Chris Spence, senior director of federal government relations at TIAA in Washington, D.C., says deferred annuities can indeed be used for ongoing savings, unlike, say, immediate annuities—a onetime purchase.
Under the SECURE Act, every 12 months plan sponsors will have to report the monthly payment amounts employees can expect in retirement. Craig Hawley, head of Nationwide’s annuity distribution unit in Louisville, Ky., says this provides new information about how an investor’s lump sum balance translates into a lifetime income stream.
The new law isn’t perfect. Kim O’Brien, vice chairman and CEO of Phoenix-based Americans for Annuity Protection, which supports the measure overall, disagrees with its removal of “stretch IRA” protections. A stretch IRA is an estate planning tool that extends—or “stretches”—the tax-deferred status of an inherited IRA when it passes to a non-spouse beneficiary.
“Under the act, many non-spouse heirs will have to empty inherited retirement accounts within 10 years,” says O’Brien.
Furthermore, the act won’t affect everybody equally. “Only certain large companies will start to think about adding [annuities],” acknowledges Will Hansen, chief government affairs officer for the Washington, D.C.-based American Retirement Association.