A Closer Look at Policy Changes and the Employer’s Role in In-Plan Annuities

Recent legislation and regulatory updates have sparked a renewed interest in in-plan annuities in employer-sponsored retirement plans like 401(k)s. These developments occur as employees seek greater financial predictability and employers seek ways to help provide that security.

Understanding the Policy Changes

The retirement policy landscape has undergone significant transformation in recent years, with several landmark legislative and regulatory changes specifically addressing in-plan annuities:

The SECURE Act: A Game-Changer for Retirement Income

When the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in December 2019, it fundamentally altered how employers could approach in-plan annuities. Among its most significant provisions:

• Fiduciary Safe Harbor Protection: The Act established a fiduciary safe harbor for selecting annuity providers, significantly reducing employers' liability concerns when incorporating lifetime income options.
• Lifetime Income Disclosure Requirements: Plan sponsors must now provide annual statements showing how individual participants' account balances would translate into monthly income in retirement.
• Portability Provisions: The Act made it easier for participants to transfer annuity investments if their employer changes providers or eliminates options - especially important for deferred annuity contracts.

SECURE 2.0: Further Expansion

Building on its predecessor, SECURE 2.0 (passed in December 2022) introduced additional provisions supporting in-plan annuities:

• Qualified Longevity Annuity Contract (QLAC) Expansion: Increased the amount participants can allocate to QLACs - deferred income annuities that begin payments later in retirement.
• Emergency Withdrawal Provisions: New rules allowing for certain emergency withdrawals without disrupting annuity contracts or triggering penalties. However, the specific impact on an in-force annuity contract may vary depending on the plan and contract terms.
• Auto-Enrollment in Lifetime Income Streams: Introduced optional plan features that enable the inclusion of annuities within default investment options or qualified default investment alternatives (QDIAs), but do not mandate automatic annuitization.

Department of Labor Guidance

The DOL has issued several interpretive bulletins and advisory opinions clarifying employers' responsibilities, including:

• Updated guidance on selecting and monitoring annuity providers.
• Clarification on how employers can satisfy their fiduciary duties.
• Information request procedures for evaluating insurance company financial strength.

These policy changes have fundamentally rewritten the rules of engagement for employers considering in-plan annuities.

Why the Change?

• Longevity Risk: With Americans living longer, there’s growing concern over outliving retirement savings driven by more extended life expectancy.
• Fiduciary Protections: Previously, employers hesitated to offer annuities due to liability worries. Recent policy changes now provide a more secure legal framework, especially when the safe harbor conditions are met.
• Simplified Portability: New rules make it easier to preserve annuity guarantees when employees change jobs or plans, particularly for deferred annuity contracts held within the plan.

These developments are meant to encourage broader adoption of guaranteed income options, which can reduce financial uncertainty for retirees.

Employer Responsibilities in Offering In-Plan Annuities

Employers have a range of responsibilities regarding the inclusion of in-plan annuities. From initial selection to ongoing oversight, updated policy guidelines shape each step, balancing opportunity with prudent risk management.

Selecting the Right Provider

Employers must vet annuity providers carefully, ensuring they’re reputable and financially strong. Under the latest guidelines, plan sponsors are expected to:

1. Assess the insurer’s long-term ability to meet financial obligations.
2. Review  the costs and features of the annuity product, wither it is immediate (starts income right away) or deferred (starts later).
3. Understand the annuity type - fixed, variable, or indexed - and how each impacts risk and participant outcomes.
4. Monitor ongoing solvency and performance metrics.

Although these steps might sound daunting, the safe harbor rules protect employers who follow established due diligence procedures.

Communicating with Employees

Once a provider is chosen, the employer’s role shifts to clear communication. Here’s what that might look like:

• Educational Materials: Provide materials that explain the differences between fixed, variable, and indexed annuities, as well as immediate vs. deferred options.
• Transparent Disclosures: Explain fees, income guarantees, market risks (if applicable), and any surrender periods or restrictions.
• One-on-One Support: Offer access to financial advisors or in-house specialists who can walk employees through their options.

Effective communication boosts plan participation and fosters employee confidence in their retirement strategy.

Monitoring and Evaluating the Annuity Option

Policy changes also underscore the importance of ongoing evaluation. Employers should:

• Conduct Regular Reviews: Help to ensure the annuity type and provider still align with your plan objectives.
• Compare Market Alternatives: Maintain awareness of new offerings or better-value products - especially for variable or indexed annuities where pricing or crediting strategies may evolve.
• Solicit Employee Feedback: Ask participants whether they find the tools and options helpful and understandable.

Ongoing oversight can help to ensure that the selected in-plan annuity remains an effective and competitive part of the overall retirement plan.

Policy Changes & Employer Liability

One of employers' most significant concerns is liability if the annuity provider fails to meet its obligations. Thanks to updated regulations:

• Employers can rely on third-party ratings and certifications as part of their due diligence.
• Safe harbor rules offer legal protection if employers follow the proper steps when selecting and monitoring annuity providers.
• Required disclosures make it easier to identify costs and reduce hidden risks - especially important with variable and indexed annuities.

By meeting regulatory expectations, employers reduce legal risk while expanding guaranteed income options for employees.

Pros & Cons of Offering In-Plan Annuities

Below is a quick-look table that highlights key advantages and drawbacks for employers considering these offerings:

This table isn’t exhaustive, but it gives employers a snapshot of the trade-offs. Notably, variable and indexed annuities may involve more complex fee structures and investment risks, while fixed annuities offer more simplicity and predictability.

The Human Element: Why It Matters

Numbers and laws might dominate the discussion, but at its core, this topic centers on people’s ability to retire comfortably. Employer decisions have a profound impact on workers’ financial well-being.

By offering thoughtfully selected in-plan annuities - whether immediate or deferred, fixed or variable - companies can:

• Demonstrate a commitment to employee welfare.
• Enhance job satisfaction and retention.
• Help close the retirement income gap that leaves many Americans vulnerable.

For employees, having the option of a guaranteed income can alleviate anxiety about market fluctuations or outliving savings. That’s no small benefit in a rapidly changing economy.

Best Practices for Employers

Based on early adopters' experiences with the new policy framework, several best practices have emerged:

1. Document, document, document: Maintain records of your selection process and ongoing reviews.
2. Prioritize education: Explain the trade-offs between fixed, variable, and indexed annuities—and how each fits into a retirement plan. Indexed annuities are not securities and do not directly participate in the stock market.
3. Consider partial solutions: Offer participants the option to annuitize only part of their savings.
4. Leverage technology: Use interactive tools to model income scenarios and explain market-related risks.
5. Monitor provider stability: Regularly review financial ratings and solvency.
6. Benchmark fees and features: Compare offerings against market standards to help ensure they remain competitive.
7. Create clear withdrawal pathways: Help participants understand how and when they can access income from immediate or deferred contracts.

These steps help employers fulfill their fiduciary obligations while maximizing the value of in-plan annuities, ultimately helping participants to achieve their retirement goals.

Sources

1. H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019 - U.S. Congress. https://www.congress.gov/bill/116th-congress/house-bill/1994/text
2. H.R.2954 - Securing a Strong Retirement Act of 2022 - U.S. Congress. https://www.congress.gov/bill/117th-congress/house-bill/2954/text
3. In-Plan Annuities: The Plan Sponsor Perspective - LIMRA. https://www.limra.com/siteassets/research/research-abstracts/2023/in-plan-annuities-the-plan-sponsor-perspective/in-plan-annuities-the-plan-sponsor-perspective.pdf
4. Retirement Confidence Survey - Employee Benefits Research Institute. https://www.ebri.org/retirement/retirement-confidence-survey