Fiduciary group offers best practices for using annuities in retirement plans

An organization that promotes a fiduciary standard of care in investment advice this week launched a program to help retirement plan advisers decide whether to include annuities in their investment menus.

The Center for Board Certified Fiduciaries’ fiduciary best practices for insurance and annuities establish a process with about two dozen steps for plan fiduciaries to follow when evaluating in-plan annuities. The best practices were introduced at the InvestmentNews Retirement Income Summit in Chicago.

The center started to develop the framework last summer after Allianz Life announced it would develop annuities that can be used within company retirement plans, said CEO Don Trone.

The key to fulfilling fiduciary duty in selecting annuities is for insurance producers to disclose cost, performance and risk information and for plan fiduciaries to assess those factors, said Barry Flagg, specialty leader for life insurance at the Center for Board Certified Fiduciaries.

“These are the big three that have been missing from the prudent process for insurance products,” Flagg said.

Find out What does the SECURE Act mean for annuities here.

The use of annuities in retirement plans has been catalyzed by the SECURE Act, approved by Congress in 2019, which includes a provision easing the legal burden on plan fiduciaries to determine the solvency of annuity providers. They can now rely on assessments by state regulators.

“There will be a proliferation of products in this marketplace,” said Larry Raymond, specialty leader for annuities at the center. “We’re just seeing the tip of it now.”

Mitch Shames, founder of Harrison Fiduciary, said a variety of annuities for 401(k) plans “are just bubbling up.” The demand for them is spurred by plan participants seeking the guaranteed income that annuities can provide in retirement.

“We’re in the very early stages of this product evolution,” Shames said. “We’ve seen some programs we’re very comfortable with. We’ve seen other programs we’re less comfortable with.”

Annuities tend to be a flash point in the debate over investment advice standards. Investor advocates point to the fact that many of them are complicated and come with high fees. Annuity proponents tout the peace of mind they can provide to retirees regarding cash flow.

State insurance regulators wrote a model annuity regulation that's being adopted by individual states. It is designed to enhance investor protections during annuity transactions but it is not a fiduciary standard.

Flagg said that rule does not go as far as the center’s best practices for annuities because the state annuity rule requires advisers to disclose costs but not justify them.

“It is a step in the right direction,” Flagg said. “”There is more to be done, and the center is filling that gap.”