Close Close
ThinkAdvisor

Life Health > Annuities

Debate: Should Annuities Be Permitted as a Default 401(k) Option?

X
Your article was successfully shared with the contacts you provided.

A bill has recently been reintroduced in Congress that would allow retirement plan sponsors to use annuities as a default investment option for plan participants who haven’t made an investment election.

Under current law, annuities are not an option that can be offered as a qualified default investment alternative (QDIA), which are a type of investment option used for plan participants who have not made their own investment decisions with respect to retirement plan funds. The Lifetime Income for Employees (LIFE) Act, which was originally introduced in 2020, does not appear to specify the exact types of annuity that could be used for this purpose.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about allowing an annuity option to function as a QDIA.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Much of the time, participants who fail to make investment elections for their 401(k) funds simply aren’t paying attention to their retirement income options. It makes sense that plan sponsors should be able to default these participants into an investment that provides a heightened level of security, meaning annuities that provide for lifetime income — seeing as that’s what saving in a 401(k) is intended to provide. 

Byrnes: Plan sponsors shouldn’t have the authority to default plan participants into what might be an irrevocable or illiquid investment. I don’t even think plan sponsors would be comfortable making that decision if this new provision does become law. It’s one thing to direct a participant’s retirement assets into a diversified investment fund; it’s quite another to lock them into an annuity. 

Bloink: Of course plan sponsors should be required to remind plan participants of their ability to select their own investments and should also notify those participants in advance about the default investment. But when it comes to selecting default investments, an annuity option should definitely be in the mix. This option would greatly increase access to lifetime income-producing products for people who might not otherwise be paying attention to those options. 

Byrnes: Not every plan participant is paying attention to the direction of their retirement funds every step of the way, of course. That doesn’t mean that these plan participants won’t take an interest later, as they begin to approach retirement age. We shouldn’t allow plan sponsors to direct their funds into any type of investment that can’t later be undone without significant consequences.

Bloink: This legislation really isn’t making any huge changes. Post-Secure Act, annuities are likely to become a much more common investment option for retirement accounts. This legislation merely reflects that reality and allows the plan sponsor to have all available options at their disposal when it comes time to make QDIA selections.

Byrnes: We need a much more nuanced and specific safe harbor that would discuss the types of annuity QDIAs that would be available — and when those options would be considered appropriate. If the plan participant has the opportunity to choose an annuity investment option, that should be sufficient. In reality, plan sponsors are unlikely to choose this option over tried-and-true diversified investment fund options as QDIAs.

___________________

  • Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
  • Discover more resources on finance and taxes on the NU Resource Center.
  • Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
  • Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.