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.
