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Robert Bloink and William H. Byrnes
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What You Need to Know

  • The Secure Act was designed to make it easier for traditional employer-sponsored retirement plans to offer annuities.
  • However, the in-plan annuity option was put on the back burner with the onset of the COVID-19 pandemic.
  • With renewed interest, now is a perfect time to reevaluate the in-plan annuity option for 401(k) participants.

Given today’s turbulent market conditions, an increasing number of clients may be newly interested in an annuity option to provide them with guaranteed lifetime income later in life.

The Setting Every Community Up for Retirement Enhancement (Secure) Act contained a provision that was designed to make it easier for traditional employer-sponsored retirement plans to offer annuities within the plan itself. Although the Secure Act was signed into law in December 2019, the in-plan annuity option was put on the back burner while many plan sponsors and employers struggled with the challenges created by the COVID-19 pandemic.

In the face of renewed interest, now may be the perfect time for business clients to reevaluate the in-plan annuity option for 401(k) participants, especially given the favorable new safe harbor provision that can ease fears of incurring liability when selecting an annuity provider.

The Secure Act Safe Harbor

Prior to enactment of the Secure Act, 401(k) plan sponsors rarely offered an annuity-within-a-401(k) option even though they were allowed to provide clients with these lifetime income options. Presumably, that was because sponsors and employers were reluctant to take on more fiduciary responsibility than they already had. Notably, employers were worried that they could be held liable if the annuity carrier became unable to satisfy their financial obligations under the contract in the future.

The Secure Act alleviated some of this concern by creating a fiduciary safe harbor for selecting the annuity provider. Plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting an objective, thorough and analytical 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 engage in 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 written representation must state that the insurance company (1) is properly licensed, (2) has met state licensing requirements for both the year in question and seven prior years, (3) will undergo financial examination at least once every five years, and (4) will notify the plan fiduciary of any changes in status.

From this information, to qualify under the safe harbor, the plan sponsor must draw the conclusion that the carrier is financially capable and that the contract cost is reasonable — in other words, the plan sponsor must have no reason to believe the representations are false. The plan sponsor must also obtain updated written representations at least once a year.

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. There is, however, no requirement that the plan sponsor choose the least expensive annuity option.

Need-to-Know for Employers

Small business clients should be advised about the importance of establishing a process to select annuity providers in compliance with the new Secure Act safe harbor rule. It’s also advisable that plan sponsors and employers use that process to select multiple acceptable annuity carriers — and then establish a process to select the best annuity carrier out of those acceptable annuity providers.

The benefits of an annuity are clear. When the client selects a deferred annuity, the client can take advantage of tax-deferred growth for decades while the annuity contract is in its accumulation phase. If the annuity was purchased with after-tax dollars, only earnings are subject to tax during the decumulation phase.

It’s also important for plan sponsors and participants to remember the importance of maintaining a diversified investment mix within the 401(k). While annuities offered within retirement plans may have lower fees and costs than annuities purchased outside the plan, they shouldn’t be the participant’s only investment. Participants should also be reminded about the importance of using their long-term retirement investment to take advantage of more aggressive investment options, especially at younger ages.


While an in-plan annuity won’t be the key to every client’s lifetime income needs, giving participants the opportunity to purchase an annuity with retirement dollars can provide more clients with access to these valuable financial products. With the pandemic-related challenges faced by employers waning, now may be the perfect time to revisit the post-Secure Act annuity option.

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