401(k) Income Solutions Threaten IRA Rollovers
What You Need to Know
Legislative changes and regulatory updates have made in-plan annuities more attractive to retirement plan sponsors and participants.
As a result, the steady flow of retirement dollars out of 401(k) plans and into individual retirement accounts could slow.
At the very least, more careful analysis and documentation of the IRA rollover process will be demanded of wealth professionals.
The rapid development of retirement income solutions specifically tailored for use within 401(k) plans is set to raise new challenges for wealth management professionals who rely strongly on rollovers to grow their books.
Don MacQuattie, leader of Raymond James’ institutional and retirement business, says many financial planners are aware of the rapid emergence of new “in-plan” income solutions in the wake of the passage of the Secure Act in 2019. However, in his experience, many advisor professionals falsely believe the in-plan income market still remains in its nascent stages, and that a full and sophisticated product set remains years or even decades away.
“In my opinion, we are just one or two years away from a product environment that will change the discussion about whether it is better for the typical retiree to roll their money out of the 401(k) plan in order to access flexible income solutions,” MacQuattie recently told ThinkAdvisor.
According to MacQuattie, wealth management professionals who do not serve retirement plans tend to assume this development won’t have much of an impact on their work.
“That’s a risky point of view,” he warns. “As 401(k) plans become more compelling retirement income vehicles, you are going to need to be able to make a more compelling case that any given rollover is truly in the client’s best interest. Frankly, there has never been a better time to have your retirement dollars in a 401(k) plan. The costs can be driven so low and the fiduciary protections carry a lot of weight.”
Ultimately, MacQuattie warns, the steady flow of retirement dollars out of 401(k) plans and into individual retirement accounts could slow in the years ahead, and by a more substantial degree than many wealth management professionals might assume. The impact on a wealth manager’s book of business could eventually be profound, he says, especially if firms aren’t able to improve their IRA offerings with respect to pricing and service quality.
How the Secure Act Changed the Game
Prior to the enactment of the Secure Act, plan sponsors rarely offered annuities or other retirement income solutions within their 401(k). Though they were allowed to provide participants with these lifetime income options, MacQuattie explains, many plan sponsors were reluctant to take on more fiduciary responsibility than they already had.
Mainly, employers were worried that they could be held liable if the annuity carrier became unable to satisfy their financial obligations under the contract at some point in the future. As MacQuattie recalls, the Secure Act alleviated much of this concern by creating a specific fiduciary safe harbor for selecting the annuity provider.
In the new regulatory environment, plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting an objective, thorough and analytical search at the outset to evaluate annuity providers. If the plan sponsor completes a prudent, loyal and well-documented provider selection process, they are protected from liability should insurance carrier solvency issues arise in the future, however unlikely that may be.
