Annuities are heading to 401(k)s

The SECURE Act provided a gateway to get annuities into 401(k)s, and many plans could begin to incorporate those insurance products as soon as this year.

Retirement plan advisers and plan sponsors are already considering which products are available, and there could soon be a trickle of more plan-specific annuities in the market, according to plan record keepers.

The new, wide-ranging legislation will lead to substantial changes in the private sector retirement savings system, including several provisions that could affect how workers view retirement income and annuities.

“In the past 30 to 60 days we’ve seen a ton of interest from advisers — and to some extent plan sponsors — on retirement income, in a way we haven’t seen in years,” said Jonathan Kreider, senior vice president and head of Great-West Investments, the asset management unit of Empower Retirement. “It’s really encouraging to me that this is suddenly a really important topic of conversation.”

Currently, annuities are seldom included as options within 401(k)s.

“Even where we see plans that have annuitization options for participants, it’s a very low uptake,” said Keri Dogan, a senior vice president at Fidelity who focuses on retirement income. But, she said, “there has been more interest among sponsors to better support these participants as they move from accumulation to decumulation.”

While the new law could lead over time to an enormous amount of new business for annuity providers, there will be opportunities for advisers to help guide clients who soon will be learning more about retirement income. That can include clearly explaining what options those participants have.

The new law makes it easier for plan sponsors to add annuities to their plan menus. Under the SECURE Act, in-plan annuities are portable, as 401(k), 457 and 403(b) plans can make distributions between trustees after a participant leaves an employer for a new job.

The new rules also help shield plan sponsors from lawsuits by providing a so-called “safe harbor” for their selection of annuity providers. Litigation is a major concern for employer-sponsored retirement plans, and a lack of clarity on the factors sponsors must consider in choosing insurers and their products has kept annuities from being widely used in DC plans for years, the insurance industry has contended.

“Having a true fiduciary safe harbor out there has removed one of the biggest impediments to widespread” use of annuities in DC plans, Mr. Kreider said. “I’m optimistic that you’re going to see some meaningful movement across the industry this year.”

One requirement in the new law could encourage savers to give more consideration to annuities. Annual 401(k) statements will be required to show an estimate of a participant’s monthly income in retirement if their projected balances were used to buy an annuity. That aspect of the law will not become effective until the Department of Labor passes a regulation outlining how the retirement income disclosures must be presented.

“There is an increased focus on people spending down their assets,” said Brian Cosmano, vice president of strategic product initiatives at Empower. “One of the issues a participant may face is how are they going to figure out the right allocation to make to a guaranteed-income product.”

Mr. Cosmano designed an investment option for the company’s DC plan clients, Dynamic Retirement Manager, that automatically shifts a participant’s assets from target-date funds to managed accounts over time. The managed accounts allow allocations to annuities, Mr. Cosmano said. 

That product launched in 2017, and about 600 plans have adopted it, according to the company. Of the new plan clients Empower added last year, 20% selected it as their qualified default investment option.

Participants need guidance on how to start withdrawing their account balances, Ms. Dogan said.

“Participants have a hard time making the mental shift to start spending down their plan [assets],” she said.

Once plan participants retire, they can take a distribution from their accounts or roll their assets into an IRA, Ms. Dogan said. But after that, many people leave the money untouched until they hit the age at which they're required to start taking distributions.

“There’s a lot more opportunity to help participants through the experience, rather than just [adding] product features or functions,” she said. “Many people say they really love the idea of guaranteed income, but they don’t love the idea of annuities.”

When participants begin seeing retirement income estimates on their statements, that could change their savings habits and make them more open to the idea of insurance products, said Frank O’Connor, vice president of research at the Insured Retirement Institute, an industry lobbying group. In addition to lifetime income annuities, plans will likely also consider fixed indexed annuities and structured annuities, he said.

For employers, adding retirement income options to plans makes sense, both from a paternalistic and practical standpoint, Mr. O’Connor said. The first companies to begin adding annuities to their plans will likely be large firms that have long-tenured and highly compensated employees, he said.

“One of the problems that employers face is when their employees get to retirement age, if they don’t feel ready to retire, they won’t,” he said. By addressing retirement income, “you can manage your workforce more effectively.”