The SECURE ACT was passed in December 2019, paving the way for substantial changes in the retirement industry. A few months later, COVID-19 struck the United States, and suddenly, everyone had much bigger priorities than retirement planning.
“Most of 2020 was lost to a chilling effect of people saying, ‘Well, this is important, but there’s a lot of other urgent issues that need to be addressed now,’” Sri Reddy, Senior Vice President of retirement and income solutions at Principal Financial Group, said.
Many businesses had to focus on their day-to-day operations to stay afloat, Ralph Ferraro, Senior Vice President of retirement plan products and solutions at Lincoln Financial Group, said. Maintaining sales, covering expenses, keeping employee health and morale up, and making sure employees could be paid were more important to plan sponsors than deciding if maybe they should think about introducing annuity solutions to their defined contribution plans.
As businesses look forward to a post-vaccine reality, there may be more appetite for considering plan innovations that increase income options for participants.
“I’m really hopeful that now with the introduction of vaccines, some level of normality, that both the SECURE Act and the innovation will proliferate to annuities, and in-plan offerings will start to happen more robustly this year,” Reddy said.
Ferraro is also optimistic about the impact the SECURE Act will have on retirement outcomes, particularly around annuity adoption.
“The safe harbor for plan sponsors for the selection of an annuity provider has really lifted some of that [fiduciary] burden … in regards to having to evaluate these types of solutions,” he said.
SECURE Act
Principal’s Reddy said the SECURE Act “was meaningful for a number of reasons,” but in terms of supporting lifetime income for retirement plan participants, there are three key elements.
One is requiring lifetime income illustrations.
“That’s a good starting step because you want people to reorient from thinking about their 401(k) balance, to thinking about what that means and how does that translate to lifetime income,” he said.
Portability is another valuable benefit for participants, he said. “If your employer chooses a different provider, or your recordkeeper no longer offers a product, that would become a distributable event for a rollover to an IRA, so that benefit that you paid for could sustain itself.”
Creating a safe harbor for annuities was important, Reddy said, “because plan sponsors often didn’t understand what their fiduciary responsibility was with insurance.”
The SECURE Act absolves plan sponsors of liability if an annuity provider they select later becomes insolvent. That’s particularly important in today’s low-interest-rate environment, Reddy said.
“This is something that I don’t know if your readership fully understands, but when rates are this low, these types of products also start becoming more expensive to offer.
There’s a direct correlation between interest rates and insurance companies’ ability to hedge and provide these guarantees 10, 20, 30 years out,” he explained.
Improving Outcomes
“You have to offer people the ability to participate; give them access,” Reddy said.
Lawmakers can do that by simplifying the administrative burdens for plan sponsors, like with Pooled Employer Plans (PEPs), he continued.
“In a nation where we’re forced to save on our own, if you have to plan for the unexpected tail events—will I live to be 90 or 95?—you have to either save 20% to 25% more, or you have to live on about 20% to 25% less income every month. Why do that when I can pool that risk [and] offer you a vehicle, whether it’s a deferred income annuity or a life-type solution, that can immunize your tail risk so that you only have to worry about managing money for a predefined period of time?” he said.
Principal commissioned a study in 2019, conducted by Michael Finke, professor of wealth management, and Wade Pfau, professor of retirement income, at The American College. The study found income annuities in retirement portfolios helped retirees get the same or higher income as an investments-only approach, with lower risk of outliving savings.
“Annuities are essentially a pension provided by a private company,” Finke said in a statement announcing the results of the study. “If you’re the type of retiree who wishes they had a pension, you can buy one through an income annuity that will provide a regular income as long as you live. If the reason you saved for retirement was to provide a secure lifestyle, there’s no more efficient way to create lifetime income that through an annuity.”
Annuity Misconceptions
“We need to start with basic education. Most participants either don’t know what annuities are or they have misconceptions about them,” Reddy said.
He continued, “Not all annuities are created equal. They don’t all deliver the same type of guarantees, and they’re priced differently.”
The industry needs to address those barriers to make annuities more palatable to savers, but Reddy also believes sponsors and advisors should address plan design from participant’s perspective so that the products they use to convert savings to income work seamlessly with the plan.
“When you look for a mutual fund or something that’s for guaranteed income, it feels clunkier than it needs to be,” he explained. “How do you get annuities as part of either the QDIA, part of managed accounts or part of the auto programs that you implement, and how do you make it so that it feels natural and intuitive for them?”
One way to help sponsors test the annuity waters with participants is to invest the employee match in a guaranteed solution, Reddy suggested.
“If I make that money liquid, you’re not fully getting the benefits of the annuity. If I make it illiquid, it feels like an irrevocable decision,” Reddy explained. Investing just the match “feels less like you’re making [a decision] on behalf of the participant, but you’re still creating good habits and good behaviors that will benefit them in the long term.”
Finding ways to integrate products seamlessly into participants’ retirement plans is an important step in achieving broad adoption.
Ferraro agrees. He suggests “the income solution needs to be embedded into a default option, into a qualified default investment alternative. By doing so, that’s going to provide the scale needed to secure the most advantageous institutional pricing, but it’s also going to help participants because that is the ideal retirement savings vehicle to really help them make the transition from savings to income.”
He added that in educating retirement plan participants, Lincoln focuses on three outcomes: protecting savings during accumulation, turning it into protected income in retirement, and providing liquidity so participants can access their money.
“It’s not so much you’re having to explain to them how everything works as much as helping them understand how this can help them help them achieve those outcomes,” he said. He compared annuities to iPhones. “I use my iPhone every day … but I don’t understand all the technical details, how it works. I do understand what it can do for me and the benefits.”
Guaranteed Income
The last decade of economic growth may have lulled participants into thinking they didn’t need to worry about guarantees, Reddy said. 2020 likely disabused them of that notion, but “having some diversified solutions that provide annuity-like guarantees I think is really important for advisors to be thinking about as they talk to plan sponsors,” Reddy said.
Ferraro believes that recent volatility has brought guaranteed income front-and-center for investors. He cited a study by the Alliance for Lifetime Income, which Lincoln co-founded, that found “Americans with a source of protected income in addition to Social Security are significantly more confident about their retirement income.”
Over three-quarters of those investors expect their income to last as long as they live, he concluded.
Sidebar: Lifetime Income for Longer Lives
In October 2020, Rep. Richard Neal, chairman of the House Ways and Means Committee, introduced with Ranking Member Rep. Kevin Brady bipartisan legislation that doubles down on retirement saving incentives passed in 2019’s SECURE Act.
“COVID-19 has only exacerbated our nation’s existing retirement crisis, further compromising Americans’ long-term financial security,” Neal said in a statement. “In addition to meeting workers’ and families’ most pressing, immediate needs, we must also take steps to ensure their well-being further down the road.”
Notably, the Securing a Strong Retirement Act of 2020, or SECURE Act 2.0, increased the age for required minimum distributions to age 75.
“The longer you leave the money working for you, the better off you’re going to be,” Sri Reddy of Principal Financial Group said.
Life expectancy in 2018 was almost 78 years old for the average American, according to The Centers for Disease Control and Prevention. The Insured Retirement Institute has lobbied for an increase in the age for required minimum distributions for years.
“By increasing the RMD age to 75, adjusting mortality tables to reflect longer life expectancies, and modifying and exempting certain annuity benefits and payments from the minimum income threshold test, the ‘Securing a Strong Retirement Act of 2020’ would provide workers with more time and opportunities to continue to accumulate and grow their savings, thereby improving their retirement security,” IRI President and CEO Wayne Chopus said in a letter sent to Neal and Brady before the bill passed.
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
