The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act last year fundamentally changed the employer-sponsored plan landscape.
While there is additional clarity as to what is next, there is still much uncertainty surrounding the implications of the changes. One of the biggest changes is the possible increase in the availability of products that offer income guarantees in defined contribution (DC) plans, as the SECURE Act made it easier for DC plan sponsors to offer guaranteed income products in the plan. In the spirit of a popular late show format and to help increase awareness of these options, here are “The Top 10 Reasons to Become Familiar with Income Guarantees”:
10.) Serenity now! Serenity now! DC plan sponsor fiduciary obligations may no longer be a source of frustration and confusion. The SECURE Act has put clear parameters around fiduciary responsibilities, reducing some of the angst that has prevailed and prevented guaranteed income products from becoming a serious consideration for DC plans. The same parameters around fiduciary responsibilities apply when choosing a guaranteed income product to receive a distribution from a defined benefit (DB) plan.
9.) Let the door hit you on the way out. The issue of portability has also been addressed by the SECURE Act. Like other DC plan contributions, those made to guaranteed income products, such as annuities, are now permitted to be transferred to other eligible plans, including individual retirement accounts (IRAs), and the income guarantees are preserved under certain conditions. Before, these income guarantees would have been lost because the plan sponsor could only surrender the product by ending its relationship with the insurance company. The portability is allowed when a guaranteed lifetime income product is no longer authorized to help in the DC plan.
8.) Assumptions be gone! The guaranteed income product industry is not what you thought it was. While there may be a stigma in some parts of the financial services industry associated with the cost and inflexibility of annuities, or even the financial viability of insurance companies, times have changed. Today, there are wide varieties of product types available with more flexibility than ever. For example, some offer lifetime income guarantees without the participant ever having to annuitize the contract. Further, the strongest insurance companies have extensive experience designing and pricing these products, as well as comprehensive suitability programs in place to help ensure their sales are appropriate.
7.) Insurance is now … cool! The industry has evolved. While many view the insurance industry as slow and stodgy, that is fast becoming a myth. The leading insurance companies have become known for their product and technology innovations. Insurtech—technology innovations related to insurance improvements—is now a “thing” and some companies even have their own venture capital arms to fund startups, all with the shared goals of improving products as well as customer experience.
6.) Easy is good. Access to guaranteed income products is easier. While it may have been more difficult and even a hassle to add a guaranteed income product to a DC plan in the past, the SECURE Act has cleared the way for plan sponsors and advisers to have better access to a variety of products to offer plan participants.
5.) Yaaaaaaawn! There is a myth out there that employer-sponsored DC plan participants are not even remotely interested in guaranteed income products. That is not the case….
4.) Show me the annuities! Employer-sponsored DC plan participants want to learn more about these products and how they can help protect them against the risks associated with retirement. In the Q1 Allianz Life Quarterly Market Perceptions Study, 61% of respondents said they were looking for more information on annuities and how they could be part of their employer-sponsored DC plan.
3.) For real! And they mean it. The same study indicated that 77% of people currently enrolled in an employer-sponsored DC plan said that if it were offered, they would consider adding lifetime income as an option in their plan. Fifty-nine percent said they would specifically consider an annuity, an insurance contract that can provide these risk management benefits.
2.) Lifetime income … the hottest ticket in town. Demand is only going to grow. The COVID-19 crisis is creating a renewed focus on retirement planning, particularly the need for lifetime income. Clients are worried about running out of money in retirement. The Q2 edition of the Allianz study referenced above indicated 72% of Americans are thinking about how they can better protect retirement savings from market volatility.
1.) There is no better time than the present. The timing is right to learn more about the options available to a DC plan sponsor. The passage of the SECURE Act was opportune in many ways and the timing could not have been better given the new reality Americans are facing as they try to protect their retirement and maintain their retirement goals.
Keeping this Top 10 list in mind, there is an opportunity for the DC plan and insurance industries to partner and work together to address the need for additional client education on guaranteed income. The demand is clearly there, and we all have an obligation to ensure clients have the necessary information to help them make informed choices toward meeting their goals and achieving a secure retirement.
Matt Gray is assistant vice president of Worksite Solutions at Allianz Life.
Annuities can help you meet your long-term retirement goals by offering a death benefit during the accumulation phase, and a guaranteed stream of income at retirement.
Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company and do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.
You should carefully consider the features, benefits, limitations, risk and fees that may be associated with an annuity, as well as the expenses, investment risks and objectives of the underlying investment options in a variable annuity. Ask your financial professional if an annuity is appropriate for you based on your financial situation and objectives.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
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