Annuities in Retirement Plans

Many now believe that defined contribution plans should now be more widely used to offer participants a guaranteed defined-benefit style option.  The original SECURE Act sought to encourage plans to offer an annuity option by creating a fiduciary safe harbor for the plan sponsor when 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 SECURE Act also makes the annuity portable once the plan participant has chosen the lifetime income option.  Some now suggest that it would be even more beneficial to automatically enroll participants in the annuity option.

We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether employers should auto-enroll employees in annuities within their retirement plans.

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

Their Votes:





Their Reasons:

Bloink: The vast majority of retirement plans and healthcare benefits are provided by employers.  These are common types of insurance designed to protect employees.  While we don't think of annuities as insurance, they really do perform that insurance function by insuring against the risk of outliving savings.  Employers are in the best position to encourage employees to select annuity options within their retirement plans on a more widespread basis.

Byrnes: We all know that annuities aren't always a wise choice for all investors, let alone the best choice.  In fact, the fees and expenses can be extremely high, and the annuity is far from the option that would benefit the widest group of individuals.  That itself makes auto enrollment highly inappropriate and a huge fiduciary risk for the plan itself.

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Bloink: Many employers already offer an annuity option within their retirement plans, but most participants simply select the default investment option and never modify those choices.  Employees who could benefit significantly from the annuity option don't necessarily dig deep enough into the available options to even evaluate whether an annuity is the best choice.  Of course, the annuity option won't be right for every single individual—but that doesn't mean we shouldn't do everything impossible to encourage the evaluation.

Byrnes: While annuities can, of course, be extremely valuable in the right situation, these aren't the types of investments that we should be auto-directing retirement savers into.  Yes, employees don't always evaluate the various options carefully when directing their retirement investments within an employer-sponsored plan.  We don't want to end up in a situation where a large percentage of plan participants are auto-enrolled and remain in the annuity option that really isn't in their best interests.

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Bloink: If employees were automatically enrolled in annuities within defined contribution plans, they would be forced to consider the option more carefully when deciding whether to opt out.  They would be under no obligation to actually keep their funds invested in the initial annuity option.  Auto-enrollment would have to be accompanied by conspicuous notice and educational materials for employees to evaluate when deciding whether to maintain the annuity investment option.  These types of lifetime income options are simply too valuable, and we should be taking steps to at least ensure employees have to consider the option.

Byrnes: Annuities are such a complicated financial product that it seems it would be virtually impossible to provide the types of educational materials that participants would have to evaluate when deciding whether to opt out.  Individualized financial advice is the key to making the right annuity choice for the client's specific financial goals and situations.  Auto-enrollment simply can't provide the types of custom-tailored advice that's necessary to ensure a good fit.