For years, the insurance industry and advocates for guaranteed income products have been lobbying to get fiduciary sanctuary for employer sponsors of defined contribution plans who put annuities in investment menus.
And for at least a good part of last year, that sanctuary was all but certain, thanks to the annuity provider selection safe harbor in the Setting Every Community Up for Retirement Enhancement Act.
Though the slam-dunk passage of the Secure Act was called into question before it was ultimately passed as part of a larger end-of-year spending package, the bill always enjoyed vast bipartisan support. The conventional wisdom was that Secure, and its annuity selection safe harbor, would ultimately pass into law, one way or another.
So it stands to reason that annuity providers were storing dry powder in the run up to Secure’s passage, ready to unleash new and improved income guarantees to the defined contribution market, perhaps at new and improved price points.
But that is not the case. And whether or not annuities become more common in retirement plans remains to be seen.
“I do think the safe harbor will create more interest from plan sponsors and drive uptake of existing options and some innovation,” said Sri Reddy, senior vice president in the retirement and income solutions unit of Principal Financial Group.
“But we are still a ways out,” he added. “We don’t know what the marketplace will accept, or what it will demand. And most recordkeepers don’t have the infrastructure to support annuities.”
Under Secure’s annuity selection safe harbor, plan sponsors can rely on the assessments of state insurance regulators to determine an insurer’s prospects for long-term solvency. A previous safe harbor required sponsors to make that assessment on their own.
That requirement spooked sponsors, who feared being on the hook as fiduciaries to retirement plans if an insurance company couldn’t meet its future obligations, according to several industry studies.
While the new safe harbor extends some sanctuary for choosing an annuity, that choice is still a fiduciary function.
And fiduciaries often get sued, especially when they run big plans.
For all plan sizes, 9.8 percent of 401(k) sponsors offer an annuity in plan, according to the Plan Sponsor Council of America. For the largest plan segment—those with more than 5,000 participants—only 5.6 percent of plans offer an annuity.
If that is to change, cost will definitely be part of sponsors’ calculations.
“Right or wrong, the market equates cost with fiduciary risk,” said Tim Walsh, senior managing director of institutional investment products with TIAA. “I do think innovation will drive adoption of guaranteed products in the 401(k) market, but the products will have to be low cost, and they will have to be simple. Providers will have to keep them institutionally priced, and not go crazy with options like lockups or surrender fees.”