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New Push for Annuities in 401(k) Plans


***UPDATED: March 20, 2018*** On the heels of a report from the Treasury Department that encouraged plan sponsors to offer annuities in 401(k)s, the Senate has introduced new bipartisan legislation. The bill, the Retirement Enhancement and Savings Act of 2018, is very similar to legislation that was unanimously passed the Senate Finance Committee in 2016. According to a recent article from Investment News, the measure is being sponsored by committee chairman Orrin Hatch (R-Utah) and Ron Wyden (D-Ore.).

“It’s like a laundry list of things that would make improvements [to the retirement system],” said Aron Szapiro, director of policy research at Morningstar Inc. “I’m cautiously optimistic about the bill’s prospects. It has a lot of bipartisan support, and I don’t think they’re reintroducing it for no reason.”

One of the significant provisions of the bill would create pooled employer plans (PEPs) that would allow small businesses to come together in a common DC plan. It would eliminate a “nexus” requirement that allows only related businesses to join an open MEP, potentially opening plans to a larger group.

“PEPs have the potential to be a pretty big game changer,” Mr. Szapiro said. “The 401(k) system works if you’re a big employer. Helping small employers is something policymakers have been trying to do for a long time.”

The legislation would also amend annuity rules, especially those involving portability, disclosure and fiduciary responsibility, in an effort to promote their use by 401(k) plan sponsors.


Original Story: November 08, 2017

Recently, the Trump administration took steps to encourage plan sponsors to offer annuities in 401(k)s, according to a recent InvestmentNews article. The Treasury Department issued a report that called for the Labor Department and Treasury to write proposals on how plan sponsors can get assistance in assessing the long-term financial strength of annuity providers.

The report apparently “encourage(s) the availability of in-plan annuity options and promote(s) broader consumer choice.” Currently, many employers steer clear of annuity products because the rules around the selection of an insurer are too risky.

“It started under the Obama administration, and still seems to have legs under the Trump administration,” said Andrew Oringer, co-chair of the employee benefits and executive compensation group at Dechert. “They’re continuing this percolation of ideas that would push people toward annuities.”

Currently, only 5% of 401(k) plans offer products with a retirement income guarantee, with approximately 12% considering adding them. Those in favor of adding lifetime-income options see it as a way to re-frame retirement savings around drawing down as opposed to accumulating assets.

“It’s a lump sum of money waiting to be spent rather than a flow of income,” Mr. Oringer said.

The previous administration tried to address this issue by setting forth rules that encouraged the use of certain longevity annuities (qualified longevity annuity contracts) in retirement plans. These rules also gave plan sponsors the blessing to use target-date funds that included deferred annuities. They also tried to put forth rules that would require participant statements to include income illustrations based on their current account balance, but the project was not completed by the end of the Obama era. Enter the Trump administration.

The current “safe harbor” rules call for plan sponsors to assess an insurer’s ability to “make all future payments under the annuity contract,” which many find as too risky considering this judgement must be held for decades into the future. Plan sponsors actually cite fiduciary exposure as their top barrier to implementation with approximately 40% naming it as a concern.

The report from the Treasury, which was issued October 27, claims that independent fiduciary assessments could be “in the form of ratings or other specific metrics” to assist plan sponsors with their fiduciary duty.  Director of policy research at Morningstar Inc., Aron Szapiro, said that he suspects a legislative fix to the issue to come during this congressional term.

The Retirement Enhancement and Savings Act, which makes it easier to offer annuities within 401(k)s, has passed the Senate Finance Committee, but has yet to make headway in the current Congress.

And then there’s the problem of annuity portability. Philip Chao, principal and chief investment officer at Chao & Co., brings up the challenge. “If a participant buys into an annuity but changes jobs and wants to transfer the money to a new plan, would they be able to do so?”

“Some kind of exchange has to be set up. It gets really complicated and that’s a problem,” Mr. Chao said. “Safe-harbor doesn’t talk about the plumbing. It only talks about selecting an annuity from a fiduciary standpoint.”

Written by Rachel Summit

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