Towards the very end of the year, the Setting Every Community Up for Retirement Enhancement Act of 2019 was signed into law. Better knows as the SECURE Act, the bill aims to increase access to tax-advantaged accounts and prevent older Americans from outliving their assets.
The law includes many provisions but one of them specifically provides fiduciary protection for plan sponsors when they choose a lifetime income product (or, annuity) for their company’s 401(k) plan.
These lifetime income annuities have been slow to catch on in retirement plans in the past for various reasons. One of the primary concerns was that plan sponsors did not want to be held liable if they chose an annuity provider that went out of business. The SECURE Act includes a provision that eliminates that concern so that more companies will offer lifetime income products in their plans and give participants a guaranteed income option.
While this provision will most likely be a boon for insurers (it was lobbied for heavily by the insurance industry), it also could be a nice benefit for plan participants. However, since annuities can be difficult to understand, and have a bad reputation to overcome for many investors, a solid communication strategy is critical when presenting this benefit in a company’s 401(k) plan.
Perhaps the worst thing that could happen would be for a company to add this provision to their plan, and then not communicate the details to the employees. Figuring out how much money to allocate to an annuity as part of an overall retirement or financial plan is an important decision that should not be taken lightly.
If your company works with an advisor to manage its 401(k) plan, make sure the advisor is made available to the employees to help educate them on the plan and the opportunities created by the SECURE Act. We do not recommend leaving the communication task up to a sales rep for the annuity provider.
Also, any financial conflicts of interest by a provider or advisor should be fleshed out up front before any type of recommendations take place. Ideally, your plan should be managed by an independent advisor who does not get paid on individual investments or products within the plan.
Overall, the SECURE Act provisions designed to promote lifetime income could be a win for plan participants as long as plans and options are delivered with clear messaging, understanding, and conflict-free advice.