Financial advisers have an opportunity to help their employer clients consider guaranteed income options for their defined benefit retirement plans as more employees want them.
BlackRock and other large asset managers are adding more annuities to their employer-sponsored retirement plans because the Secure Act of 2019 reduces plan sponsors' concerns over legal liability.
Here's what financial advisers need to know about the opportunities these retirement plan changes mean for the market.
A Safe Harbor for Annuities in Retirement Plans
Employers crave certainty when it comes to retirement benefits, and that's what the Secure Act provides when it comes to lifetime income options. If plan sponsors select lifetime income options for their employees, they have a safe harbor in the Secure Act, which means they do not have any legal liability as long as they follow the rules laid out in the law.
The law improves the portability of lifetime income options. Previously, plan sponsors were hesitant to offer annuities in a defined contribution plan, such as a 401(k), because of how illiquid these investments were compared to other investments.
Under the safe harbor rules, plan sponsors can switch annuity providers without disrupting participants' accumulated lifetime income by avoiding surrender charges and additional fees associated with a provider change in the past. Plan participants can now transfer their lifetime income option into another qualified retirement plan or an IRA.
A Shift in Perspective About Retirement Savings
The Secure Act may shift how employees fundamentally view their retirement savings.
Plan sponsors are required to show monthly income benefit illustrations to plan participants. These mandatory projections illustrate the monthly income stream participants are expected to receive in retirement rather than focus on the total lump sum.
The U.S. Department of Labor is expected to issue final rules on illustrations of lifetime income in retirement plans soon. Meanwhile, an interim rule requires employers to show retirement plan participants an estimated monthly income from a single life annuity and a joint annuity with benefits for a surviving spouse at least once a year if they annuitized their balances.
Employees Want More Guaranteed Lifetime Income
Even without the new regulations, more employees want some annuitized income in retirement. As fewer employers no longer offer traditional pension plans that provide lifetime income, more employees are looking for options that prevent them from running out of savings.
Eight in 10 participants prefer adding guaranteed income options to their defined contribution plans, according to new research from the Alliance for Lifetime Income's Retirement Income Institute.
The research also found that nearly twice as many participants prefer a mix of annuitized income, such as a pension and investments, to a retirement benefit that offers only one or the other. In fact, only 26% of people surveyed indicated they would prefer investments only.
"It is critical that employers take a look at their offerings and understand their workforce's desire for protection and greater retirement security," says Jason Fichtner, senior fellow for the Alliance for Lifetime Income's Retirement Income Institute