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 (expected by year-end), many annuity providers will be celebrating.
"The SECURE Act will make it easier for employers to offer as part of their retirement plans annuities that provide a guaranteed stream of lifetime income," says Kathleen Coulombe, vice president of retirement security and federal relations at the Washington, D.C.-based American Council of Life Insurers.
Including annuities within retirement plans isn’t without controversy. "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 interests. 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 Act extends "safe harbor" protections for plan sponsors when they select annuities, reducing their potential liability even if the insurer defaults. "But there is no language requiring certain products over others," Richman says.
In addition, workers aren't required to choose annuities. "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 Washington, D.C.-based Alliance for Lifetime Income.
The Act also answers concerns about portability—i.e., what happens if a worker changes jobs? "Under current law, a huge impediment to offering lifetime income is the plan sponsor’s concern that participants could lose guarantees" in the event of such a change, said Carol McClarnon, a partner at Eversheds Sutherland, a Washington, D.C.-based law firm.
But the Act, she explains, specifically allows direct transfers from one retirement plan to another, preserving participants' investments and avoiding surrender charges and fees.
401(k)s are ongoing savings vehicles, of course, while many annuities aren't. That doesn't faze proponents, however. Chris Spence, senior director of federal government relations at TIAA in Washington, D.C., says that unlike, say, immediate annuities which are a one-time purchase, deferred annuities can work as ongoing savings vehicles.
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.