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Revived Bill Would Allow Annuities as Default 401(k) Investment

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What You Need to Know

  • The Lifetime Income for Employees Act would allow retirement plan sponsors to use annuities as qualified default investment alternatives.
  • The bill would increase access to annuities, TIAA's Duckett says.
  • It builds on the Secure Act, which opened the door for more annuities in retirement plans.

Reps. Donald Norcross, D-N.J., and Tim Walberg, R-Mich., reintroduced legislation Tuesday, the Lifetime Income for Employees (LIFE) Act of 2022, that would allow annuities to be a default investment option in employer-sponsored 401(k) plans.

The bill builds on the Setting Every Community Up for Retirement Enhancement (Secure) Act by allowing retirement plan sponsors to use annuities as qualified default investment alternatives, or QDIAs, for a portion of contributions made by participants who have not made investment selections.

The LIFE Act addresses certain requirements in the QDIA regulatory safe harbor “that prevent employers from being able to benefit from the safe harbor if they include annuities as part of their retirement plan’s default investment,” said Thasunda Brown Duckett, CEO of TIAA, in a Tuesday letter to the lawmakers.

Increasingly, Duckett said, “retirement plan participants rely on their plan’s default product as their long-term investment strategy. While many participants mistakenly believe the default option provides a guaranteed retirement income, most QDIA products do not.”

By amending the QDIA safe harbor, Duckett continued, “the LIFE Act will encourage more employers to adopt annuities as part of their default offering so that more Americans will be able to transition seamlessly from saving for retirement to benefitting from a guaranteed income stream when they retire.”

The LIFE Act also builds upon “the Secure Act provision that enhanced the safe harbor on which plan sponsors rely when choosing an annuity provider for their retirement plan,” Duckett said.

Paul Richman, chief government and political affairs officer for the Insured Retirement Institute, added in another statement that under the bill, the current QDIA safe harbor regulations would be amended to allow, but not require, a QDIA to include a limited investment — up to 50% — in a non-liquid annuity component, which provides a guaranteed return on investment.

Plan sponsors would not need to make any changes to their current QDIA.

Current Labor Department regulations governing QDIAs “have created a barrier to using certain investments — including protected lifetime income solutions like annuities — that do not meet specific liquidity requirements,” Richman said.

The Labor Department issued an information letter in 2016 that makes clear that an investment with an annuity component can be offered consistent with a plan sponsor’s fiduciary duty, Richman continued. “However, the current QDIA safe harbor regulation would not allow the investment to serve as a QDIA.”

The bill “would simply update regulations to reflect innovations in retirement security investment products,” Richman added. “The solution provided by the Lifetime Income for Employees Act will significantly increase access to and the use of protected lifetime income products to help retirement savers produce sustainable income during their retirement years.”