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Debate: Is Defaulting 401(k) Participants Into Annuities in Their Best Interest?

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One provision in the Setting Every Community Up for Retirement Enhancement (Secure) Act provides extra assurance and protection to retirement plan sponsors that follow certain rules to select annuities as in-plan offerings. Plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting a detailed 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 as do 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). 

The representation must state that the insurance company is properly licensed and met state licensing requirements for both the year in question and seven prior years, and will undergo financial examination at least once every five years, and notify the plan fiduciary of any changes in status. The plan sponsor must determine that the cost of the annuity option is reasonable in relation to the benefits and features provided by the annuity. 

Many expect that these relaxed rules will encourage more retirement plans to offer annuities as a default option for participants who do not make their own elections.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether retirement plans should default 401(k) participants into annuity options.

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

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Annuities provide a sound way to offer guaranteed lifetime income for retirees. Retirees who have yet to make their own investment decisions are often simply not paying attention. Of course, plan participants would always be entitled to opt out of the annuity option at any time prior to retirement — and employers would be required to provide notice of their right to do so. If we have to choose a default option for plan participants, annuities seem to be the most effective way to ensure that Americans are protected throughout retirement.

Byrnes: Offering annuities as a default investment to retirees would be doing those retirees a significant disservice. It would prevent advisors from being able to offer the holistic, big-picture advice that these taxpayers need and deserve as they enter retirement. There’s no reason why retirement plan participants shouldn’t be making their own decisions on these matters — we need to focus on education so that these participants understand their rights.

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Bloink: We now have a detailed set of rules that retirement plan sponsors must abide by before they select a provider. These carefully selected requirements are designed to make sure these annuity products suit the participant’s needs — making the annuity default even more attractive.

Byrnes: Financial advisors are most effective when they’re able to evaluate the client’s situation and take steps to best put their assets to work to further the client’s goals. Defaulting 401(k) funds into annuities would rope off a large portion of most Americans’ assets, regardless of whether the annuity option is actually the best choice for the specific client.

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Bloink: Plan participants who allow their investments to be put into a default investment option may not even have financial advisors. Not every taxpayer has the resources or desire to work with a professional financial advisor. It’s those very participants who will benefit the most from the default annuity option.

Byrnes: Defaulting participants into annuities would trap many retirees into a product that may not fully suit their needs — regardless of the steps that the plan sponsor takes to make sure that the annuity itself is sound. The issue isn’t whether the annuity provider is financially stable. It’s that the annuity may be the wrong default option for plan participants.

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