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401(k) rollovers notebook

Retirement Planning > Retirement Investing > Annuity Investing

401(k) Plans Are Coming for Your Rollovers

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What You Need to Know

  • More 401(k) plan sponsors are adding or considering lifetime income options, due in large part to a safe harbor provided in the Secure Act
  • This could result in more retiring workers leaving their assets in-plan.
  • Advisors who want to protect their rollover business need to up their retirement income planning game, says Michelle Richter of the Institutional Retirement Income Council.

Back in late December of 2019, then-President Donald Trump signed the Setting Every Community Up for Retirement Enhancement Act into law.

The bipartisan legislation, known more commonly as the Secure Act, had been in the works for several years and included many provisions. According to Michelle Richter, executive director of the Institutional Retirement Income Council, among the most important provisions was the creation of a “fiduciary safe harbor” for the selection and use of annuity products within 401(k)-style retirement plans.

As Richter tells ThinkAdvisor, this safe harbor was considered essential for the growth of guaranteed income in DC plans, given that many plan sponsors had been reluctant to use in-plan annuities due to possible fiduciary liability issues. Among their concerns was the fact that an insurer selected to underwrite an in-plan income annuity could later become insolvent, putting the plan sponsor back on the hook for promised benefits.

Now, as 2022 draws to a close and financial advisors set their practice goals and strategic priorities for the coming year, Richter says it is essential to understand how the Secure Act, alongside various regulatory actions anticipated from the Labor Department during 2023, could affect the world of “in-plan retirement income.”

Richter says it is likely that the growth of in-plan annuity solutions could result in many more people leaving substantially more assets within their employers’ 401(k) plans. Given this potential trend, wealth advisors may find that their clients grow less and less eager to enact rollovers of potentially sizable 401(k) balances merely to access retirement income products or non-guaranteed spending strategies.

Employer Views Are Changing

To back her point, Richter cites research from TIAA showing that nearly nine in 10 defined contribution plan sponsors who do not today offer in-plan guaranteed lifetime income annuities are at least somewhat interested in offering them in the near future. Other data shows three in four plan sponsors are extremely or very interested in offering a target date fund that allocates a portion of participant assets to lifetime income.

Richter says employers understand that it has become essential for 401(k) plans to offer sources of guaranteed lifetime income, such as annuities. Such products not only supplement lifetime income from Social Security, but they also help to replace lifetime income that would traditionally have been provided through a pension plan.

Richter says employers and employees both appreciate this dynamic, and many fiduciaries feel the Secure Act’s annuity selection safe harbor has opened an important door. The law, Richter explains, negated the need for employers to conduct ongoing review of an insurer’s capital requirements, liquidity and solvency. Instead, the employer is able to rely on written representations from the insurer, which must confirm that the insurer has complied with certain regulatory, financial reporting and auditing requirements.

Why It Matters for Wealth Advisors and Insurance Reps

Richter says many wealth advisors and retail insurance professionals hear this story about the expanding demand and interest in in-plan retirement income and assume that it won’t impact their operations. She says she understands that point of view, given the traditional division that has existed between the wealth and institutional advisory and insurance arenas, but times are changing.

A big reason why, in addition to the Secure Act safe harbor, is the simple fact that Americans have more money than ever saved in DC plans. Many in the baby boomer generation are carrying six-figure or even seven-figure 401(k) balances into retirement, and they are going to be seeking products and advisory solutions to help them spend their money safely and efficiently.

Simply put, if retirement plan recordkeepers create a compelling value proposition for investors to stay on their platforms, Richter warns, this could have a substantial impact on the pace and scale of future rollovers.

Richter predicts leading retirement plan recordkeepers can be expected to follow in the direction of Fidelity, which will roll out a new in-plan annuitization platform in 2023 called Fidelity Income Direct. If a sizable portion of Fidelity’s nearly $3 trillion in assets ends up staying in-plan, this will clearly have an effect on the wealth management industry.

In the end, Richter says, the wealth management and insurance brokerage communities are destined to lose clients and assets if they do not address what she sees as a widespread lack of expertise in retirement income planning. She believes traditional wealth advisors, if they want to protect their rollover businesses in the coming environment, are going to have to become much more capable as genuine income planners.

For insurance reps, she says, it makes a lot of sense to consider either founding their own RIA or joining an existing one. Otherwise, it is hard to see how they could be compensated for income planning services without running afoul of prohibited transaction rules under ERISA.


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