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

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.

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