Back in 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act allowed defined contribution retirement plans such as 401(k)s to offer annuities for the first time. These annuities had to provide guaranteed lifetime income, but other than that there were few restrictions.

In 2022, a bipartisan group in the U.S. House of Representatives introduced the Lifetime Income for Employees (LIFE) Act to take the idea further. The LIFE Act extends the SECURE Act’s “safe harbor” provisions that protect plan sponsors from annuity defaults. Though it hasn’t passed yet, it’s one of several measures aimed at building on the foundation of previous legislation to make annuities more compatible with 401(k) plans.

The idea is that with an annuity component, defined contribution plans will more closely resemble the once common defined benefit plan—i.e., pensions. More choices are usually better, but what exactly does it mean for your clients?

The Case For Annuity Inclusion
Jim Szostek, vice president and deputy of retirement security at the American Council of Life Insurers in Washington, D.C., says the inclusion of annuities in DC plans makes sense. “Annuities are the only product in the marketplace that can guarantee a lifetime income to supplement Social Security.”

Annuity provider Lincoln Financial also favors in-plan annuities. Ralph Ferraro, senior vice president and head of retirement plan services at the Radnor, Pa., firm, says that with annuities on board “employer-sponsored retirement plans can become more than an accumulation vehicle.”

That is, they can help with the “decumulation” that’s needed in retirement. “While accumulation is a well-understood concept and the objective of most plan options, the spending or decumulation part of the equation seems to be less clear to retirement savers, particularly as they try to project spending needs once their working years are behind them,” says Matthew Lemieux, senior vice president of product management at Jackson National Life Distributors in Nashville, Tenn. In-plan annuities provide a much-needed “level of income certainty that continues to be the No. 1 concern of those in or nearing retirement.”

Frank O’Connor, vice president of research at the Insured Retirement Institute in Washington, D.C., puts it this way: “The intent of a retirement plan is to provide retirement income”—which wasn’t happening when annuities weren’t involved.

Annuities can also provide other advantages not available in other 401(k) investment options, says O’Connor. Among them, he cites death benefits and downside protection in case markets fall.

The Case Against Annuities In Plans
While all this is no doubt true, it’s also undeniable that annuities aren’t right for everyone. “Income annuities likely won’t be the best recommendation [for] a typical retiree’s income strategy,” says Colleen Jaconetti, a senior manager at Vanguard’s Investment Advisory Research Center in Malvern, Pa.

Instead, she argues that a disciplined spending rate from a diversified investment portfolio provides greater flexibility and upside potential. “A low-cost annuity may be a viable complement to the investment portfolio,” she says, but it should never be “the primary instrument” for funding retirement income—or the only option plan sponsors offer.

What’s more, annuities “come with added fees, potential lower rates of return, and illiquidity risks,” says Spencer Betts, a financial planner and chief compliance officer at Bickling Financial Services in Lexington, Mass. Betts is also an ambassador of the Certified Financial Planner Board of Standards.

For some, those extra burdens can be too much. “Investors should proceed with caution and make sure the benefits outweigh the fees,” says Eric Bond, president of Bond Wealth Management in Long Beach, Calif.

Redundant Tax Advantages
Yet another key objection to placing annuities inside 401(k)s is that both are tax-advantaged instruments. Combining them provides no additional tax benefit.

“The tax deferral is redundant,” acknowledges Christopher Van Buren, a private wealth advisor at LVW Advisors in Pittsford, N.Y. “But the other benefits [of annuities]—such as guaranteed income—are very attractive.”

David Blanchett, Lexington, Ky.-based head of retirement research at PGIM, the investment management group of Prudential, concurs. “I just don’t think the tax advantaged nature of annuities is really the fundamental value proposition of the products,” he says.

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