“The reason for using an annuity,” says Eugene “E.J.” Long at Long Financial Group in Blue Bell, Pa., “is not the tax deferral but the proposed guarantee that the insurance company will pay a future income for life … plus spousal protection.”

Clients Want What Annuities Have
Studies show that annuities are wanted by many 401(k) holders. “Research from our Retirement Income Institute shows that close to half [of respondents] prefer a mix of protected lifetime income—annuities—and investments, and over 80% prefer a retirement plan that substitutes guaranteed income for bond investments,” says Cyrus Bamji, chief communications officer for the Washington, D.C.-based Alliance for Lifetime Income.

Besides guaranteeing lifetime income, in-plan annuities have another advantage. “The portability factor is important to savers,” says Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco. “When an employee changes jobs, they can take the annuity with them.”

Can Plan Sponsors Handle Annuities?
Yet some remain concerned about suitability. “Annuities are way too complex for plan sponsors to properly vet and understand,” says Karl Wagner III, a partner and senior wealth advisor at Biondo Investment Advisors in Sparta, N.J.

On the other hand, suitability may depend on the employer. To some extent, the degree of complexity comes from “how the products are ultimately offered and positioned to participants relative to other plan options,” says Lemieux at Jackson National. Plan sponsors, he says, should invest “in education and planning tools.”

That may be easier for some than others. “Large plan sponsors probably have the resources and personnel … to navigate the annuity landscape. My fear is for the small plan sponsor,” says M. Tyler Ozanne, a principal at Probity Advisors in Dallas. “Many of these plan sponsors barely have enough time and energy to properly maintain the administrative requirements for their plans, let alone the investment options. Add to those responsibilities the need to understand the vast annuity landscape, and I am afraid these plans might be exposed to the wolves of annuity salesmen.”

Simplifying Annuity Options
Ozanne would like to limit the types of annuities allowed in defined contribution plans to only the most basic types.

“It’s important to discern the difference between an immediate annuity [which provides] a stream of guaranteed income from a lump sum, usually with low cost, and a deferred annuity [which is] usually high cost, high commission and has terrible returns,” says Steven Podnos, a certified financial planner at Wealth Care in Cocoa Beach, Fla. He fears sales reps will push the latter just to earn commissions.

But Cathy Marasco, assistant vice president of product development at Nationwide Retirement Solutions in Columbus, Ohio, doesn’t quite agree. “As with any new solution in our industry, there is a period where plan sponsors need to ramp up their understanding. That’s what’s happening right now,” she says.

Moreover, annuity providers insist the products are more user-friendly than ever. “This new breed of in-plan annuities is flexible and easy to administer,” says Matt Gray, assistant vice president for worksite and middle markets at Allianz Life in Minneapolis, Minn.

Legal Protections
Part of what the SECURE Act did was establish a fiduciary “safe harbor” for plan sponsors when they choose annuity products. “Plan sponsors must follow guidelines and rules to qualify for the safe harbor,” explains Rick Tasker, a managing director and principal at Robertson Stephens in Santa Rosa, Calif. To that end, the plan sponsor has to file annual benefit statements and fee disclosures, as well as allow members to transfer their annuities to an IRA or other retirement plan if the sponsor phases out the option.

“The existing regulatory framework effectively protects consumers against potential problems or conflicts,” says Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute. He notes, however, that his organization welcomes opportunities to discuss and address any problems that do arise.

Still, some wish the rules required partnering with a certified financial planner. “The average investor will need to understand the pros, the cons and the features,” says Grace Yung, a CFP Board ambassador and managing director at Midtown Financial Group in Houston.

Jason Branning of Branning Wealth Management in Ridgeland, Miss., goes a step further. “The insurance companies that offer annuities in 401(k)s should have a fiduciary mandate that is consultative,” he says, “rather than servicing the plan sponsors with a commission-based sales team.”

An Optimistic Outlook
Looking forward, the outlook seems optimistic. Allowing annuities in 401(k)s “opens the door for carriers to innovate and tailor product designs for this market,” says Paula Nelson, head of strategic growth for individual markets at Global Atlantic Financial Group in New York City.

Blanchett at PGIM agrees. Expanding the annuities market “could allow for the introduction of a series of high quality, low-cost products that haven’t been introduced in the retail space yet,” he says. “Overall, I see this as definitely a potential win for consumers.”

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