The Secure Act contains provisions that will impact nearly every client saving for retirement—along with many who have already begun taking withdrawals from qualified plans and IRAs.
The Secure Act provisions impacting lifetime income options in defined contribution plans have the potential to be some of the most significant. Although it is expected that most 401(k)s will not begin offering annuity lifetime income options immediately, the new rules could have a substantial impact on the way clients plan to secure their retirement income. Because more clients are likely to begin seeing an annuity option in their 401(k) in the near future, it’s important that they have a sense of how they might benefit—and what they should watch out for when making an informed choice.
Secure Act Rules Impacting Lifetime Income Options
Prior to enactment of the Secure Act, 401(k) plan sponsors rarely offered an annuity-within-the-401(k) option even though they were allowed to provide clients with these lifetime income options—primarily because sponsors and employers were concerned with taking on more fiduciary responsibility than they already had. The Secure Act alleviated some of this concern by creating a fiduciary safe harbor for selecting the annuity provider.
Plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting an objective, thorough and analytical search at the outset to evaluate annuity providers. The sponsor must also evaluate the insurance carrier’s financial capability to satisfy the annuity obligations, as well engage in a cost-benefit analysis with respect to the annuity offering (the sponsor is permitted to rely upon a written representation from the insurance company demonstrating the carrier’s financial standing). Finally, to qualify under the safe harbor, the plan sponsor must draw the conclusion that the carrier is financially capable and that the contract cost is reasonable.
While this provision is expected to make it easier for plan sponsors to offer annuity options, the Secure Act also makes the annuity portable once the plan participant has chosen the lifetime income option. After December 31, 2019, the annuity can be transferred in a direct trustee-to-trustee transfer between qualified plans (or between a qualified plan and an IRA) if the lifetime income option is removed from the original plan’s investment options.
The Secure Act also gives clients more information that can allow them to evaluate how the annuity option could work for them. Effective 12 months after the Department of Labor issues guidance, defined contribution plans will be required to provide participants with lifetime income estimates. Practically, these estimates will take the form of an annual disclosure containing an estimate of the monthly income the participant could receive as annuity based upon the participant’s account balances.