Provisions that would encourage the use of annuities in 401k plans would make the SECURE Act the most sweeping retirement reform since the Pension Protection Act of 2006.
Annuity providers have long wanted to tap into the trillions of dollars in DC plans, and Section 204 of the SECURE Act offers 401k plan administrators a safe harbor from litigation if they give workers the choice of an annuity from a provider that nonetheless ends up going out of business or defrauding employers.
The lack of a safe harbor is the primary reason annuities aren’t offered in the vast majority of 401k plans currently.
While the insurance/annuity industry has obviously lobbied long and hard for passage of the SECURE Act, there are plenty of detractors who say the proposed legislation amounts to a cave-in to the insurance industry that would stand to benefit from greatly expanded use of annuity products in many plans.
David Moon, a columnist for the Knoxville News Sentinel, is one detractor, and bashed the SECURE Act’s pro-annuity provisions in a widely syndicated column on May 30. He argued the insurance industry is among the biggest donors to some of the bill’s sponsors, including House Ways and Means Committee Chair Richard Neal (D-MA).
“…the real purpose of the bill is to make it much easier to sell annuities within 401k plans. Period. It is a piece of insurance company legislation jokingly masquerading as something to help the little guy. In reality, it does the exact opposite. It makes the least sophisticated investors more susceptible to some of the most expensive, complex and illiquid financial products ever created,” Moon wrote.
“The insurance industry even managed to have the bill require (yes, require) plan sponsors to essentially include an annuity advertisement in annual participant statements. This ‘lifetime income disclosure’ would project how much money a person might receive if he moved all his 401k assets into an annuity. The bill also provides legal protection for employers if (Surprise! Surprise!) those projections prove to be overly optimistic,” Moon continued.
Those comments didn’t sit well with Chuck DiVencenzo, president and CEO of the National Association for Fixed Annuities (NAFA) in Washington, D.C., who penned a response that also ran in the Knoxville News Sentinel on June 25, saying Moon misrepresents or misunderstands the provisions providing for lifetime income that are proposed in the legislation.
“It should be noted that the bill does not require any employer to offer annuities,” DiVencenzo said in the op-ed. “Significantly though, employers are required to annually provide a lifetime income illustration to help 401k plan participants understand what their current account balance, saving patterns and investments might provide as a monthly income stream during retirement. Accordingly, the legislation would help consumers understand the risks of saving too little during their accumulation phase in an effort to secure a stable retirement income for their lifetime.”
Annuity advocates have plenty on plates
Annuity advocacy organizations, including NAFA and the Insured Retirement Institute (IRI), spend a lot of time lobbying Congress on behalf of annuities, but also spend a lot of time trying to counter a steady stream of negative press opposing annuities as being complicated, illiquid products with high fees.
DiVencenzo took a few moments recently to share his insight about the SECURE Act with 401k Specialist, where he also explained why NAFA defends annuities from incomplete facts or blatant misrepresentations.
“There is so much misinformation about annuities, and my goal is to clarify common misconceptions. The public at large generally does not understand the difference between the types of annuities, including variable, fixed, fixed index, immediate or deferred and all the combinations of these products,” DiVencenzo said. “They can be complicated, as they have components that mitigate risks through insurance features like a death benefit and lifetime payouts as well as annuities that are registered as investment products.”
What ultimately ends up happening, he says, is that someone who is critical of annuities will lump all of the products together and cherry-pick the least advantageous feature of each type to try and argue that these products aren’t serving the individual’s needs.
“Nothing could be further from the truth,” DiVencenzo says. “People in the 50-plus age bracket understand the need for products that guarantee a lifetime income and secure a stable retirement income, a fact that is reflected in many surveys including TIAA, EBRI and, most recently, The National Institute on Retirement Security March 2019 survey.”
In addition, DiVencenzo says investment products that may provide great opportunity for growth and diversification during the accumulation phase for a 401k participant fail to adequately mitigate the substantial risks during the deaccumulation (retirement income) phase.
Hoping bill passes as written
DiVencenzo adds that NAFA is happy with the current annuity safe harbor language in the SECURE Act, and believes it will facilitate “great annuity offerings” in employer plans.
“More importantly, the SECURE Act recognizes the importance of plan participants’ understanding the cost of guaranteed lifetime income and the difference from a simple investment strategy as they accumulate assets and all the risks associated with the deaccumulation of their 401k nest egg and that they bear all the risks associated with their particular set of issues,” he adds.
“Consumers face risks like longevity, health care costs, and sequence of return—all while they can no longer contribute to their plan and have lost the ability of earning the same wages in the event their 401k plan nest egg is used or significantly affected by inevitable market fluctuations over a 20-30 year time frame,” DiVencenzo says.
As for what happens next, DiVencenzo says NAFA is optimistic the Senate will act by the August recess and believe the Senate will ultimately accept the SECURE Act as passed by the House. “Ideally the Senate will pass the bill by unanimous consent, especially given the broad bipartisan support evidenced by the House 417-3 vote and the rich history of bipartisan support in the Senate for most of the SECURE Act provisions which are largely comprised in the RESA language,” he says.
If the Senate does end up passing the House version, DiVencenzo estimates that changes would begin to be phased into the marketplace by the middle of next year and continue to grow.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.