A bill that would allow retirement plan sponsors to utilize annuities as qualified default investment alternatives (QDIA) was reintroduced this morning by Representatives Donald Norcross (D-NJ) and Tim Walberg (R-MI).
Reps. Norcross and Walberg, who serve together on the House Committee on Education and Labor’s Health, Employment, Labor, and Pensions (HELP) Subcommittee, reintroduced the Lifetime Income For Employees (LIFE) Act of 2022. This legislation would allow lifetime income solutions to be a default in employer-provided 401(k) plans to deliver employees with a steady, guaranteed income during retirement.
QDIAs, created by the Pension Protection Act of 2006, have proven to be an essential tool to enhance retirement security by providing retirement savers with the ability to accumulate assets without needing to make underlying investment selections inside of their workplace retirement savings plan.
“American workers are concerned about retirement and their concerns are not unfounded. Seven out of 10 Americans say they’re living paycheck to paycheck and 80% say they’ll need to work in retirement due to lack of savings,” Norcross said. “The number of private-sector workers receiving lifetime benefits from a traditional defined benefits pension plan has declined from 60% in the 1980s to only 4% today. As a retired electrician, I know first-hand how important pensions are to workers who rely on them for their retirement. By creating ‘individual pensions,’ this legislation will provide hard-working Americans with a guaranteed income so they can retire with dignity.”
The representatives pointed to a steady drumbeat of studies and analyses they say paints a dire picture for the retirement of many Americans. Demographics play a large role, as Baby Boomers retire and people live longer—increasing the number of people and number of years individuals will rely on retirement benefits. The LIFE Act is bolstered by research and analysis that promotes annuities as a policy solution to the looming retirement crisis facing American workers.
“For too many families, the thought of having enough set aside for their retirement years remains out of reach,” Walberg said. “Encouraging and increasing access to savings options will help provide workers with greater peace of mind that their income will last throughout retirement. I am pleased to work with Rep. Norcross on this bipartisan effort to help families achieve financial security after a lifetime of hard work.”
Norcross and Walberg originally introduced the bill in the House on Dec. 16, 2020, seeking to build upon the SECURE Act by ensuring that more savers have access to annuities.
Supporters chime in
“TIAA applauds Representatives Norcoss and Walberg for their dedication to modernizing and improving the retirement system,” said TIAA CEO Thasunda Brown Duckett, who sent a letter of support for the bill. “This important legislation will help more Americans gain access to annuities through defined contribution plans.”
In the letter of support, TIAA pointed out that in making these changes, the LIFE Act also builds upon the SECURE Act provision that enhanced the safe harbor on which plan sponsors rely when choosing an annuity provider for their retirement plan. While the enactment of this improved safe harbor was a significant step, the LIFE Act will take the critical next step and ensure more savers have access to annuities.
“Annuities are vital to retirement security because they are the only products that provide individuals with guaranteed returns and a guaranteed stream of income in retirement,” Brown Duckett added. “TIAA strongly supports efforts to improve access to such products. This legislation will encourage employers to adopt annuities as part of their default offering so more Americans can seamlessly transition from saving for retirement to realizing guaranteed income when they retire.”
The Insured Retirement Institute was also quick to release a statement of support for the bill.
“This bill would help address the insecurity and anxiety workers and retirees across America are feeling today about their ability to accumulate sufficient savings to provide them with income that will last throughout their retirement years,” said Paul Richman, IRI Chief Government and Political Affairs Officer.
“The solution provided by the Lifetime Income for Employees Act will significantly increase access to and the use of protected lifetime income products to help retirement savers produce sustainable income during their retirement years.”
IRI’s Paul Richman
IRI’s consumer research shows significant interest in protected lifetime income solutions, such as annuities, among workers. IRI found that nearly eight in 10 workers would likely allocate a portion of savings to an in-plan annuity with a lifetime income guarantee. Almost 90% believe protected lifetime income is important.
Under the bill, the current QDIA safe harbor regulations would be amended to allow, but not require, a QDIA to include a limited investment in a non-liquid annuity component, which provides a guaranteed return on investment. Plan sponsors would not need to make any changes to their current QDIA.
“Current Department of Labor regulations governing QDIAs have created a barrier to using certain investments—including protected lifetime income solutions like annuities—that do not meet specific liquidity requirements,” Richman said. “The regulations have created an environment where savers who utilize their plan’s QDIA only invest in vehicles that build assets and contain no mechanism to convert those assets into guaranteed income during their retirement years.”
The Department of Labor issued an information letter in 2016 that makes clear an investment with an annuity component can be offered consistent with a plan sponsor’s fiduciary duty. However, the current QDIA safe harbor regulation would not allow the investment to serve as a QDIA.
“This legislation would simply update regulations to reflect innovations in retirement security investment products,” Richman added. “The solution provided by the Lifetime Income for Employees Act will significantly increase access to and the use of protected lifetime income products to help retirement savers produce sustainable income during their retirement years.”
SEE ALSO:
• SECURE Act’s Impact on Retirement Plans (So Far)
• Annuities Best for Middle- and Mass-Affluent Clients, Advisors Say
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.
Does Ken Fisher approve?
Foolish idea. Participants will receive a guaranteed stream of dollars that will purchase less and less each year.
If the payment is indexed to inflation and if the payouts are based on standard distribution rates it could be a good idea, but unfortunately few payouts increase with inflation and we have reviewed too many annuities that, when the funds come from the insurance company’s accumulation vehicle, such as a 401k, the distribution rates are sub-par, meaning a lower income level than they would get if shopping on an open market. They also need to realize these payments come from the General Asset Account of the insurance company, and if you check those returns which are restricted to mostly fixed income assets, few exceed 5% today.