Debate: Is Defaulting 401(k) Participants Into Annuities in Their Best Interest?
One provision in the Setting Every Community Up for Retirement Enhancement (Secure) Act provides extra assurance and protection to retirement plan sponsors that follow certain rules to select annuities as in-plan offerings. Plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting a detailed search at the outset to evaluate annuity providers.
The sponsor must also evaluate the insurance carrier’s financial capability to satisfy the annuity obligations, as well as do a cost-benefit analysis with respect to the annuity offering (the sponsor is permitted to rely upon a written representation from the insurance company demonstrating the carrier’s financial standing).
The representation must state that the insurance company is properly licensed and met state licensing requirements for both the year in question and seven prior years, and will undergo financial examination at least once every five years, and notify the plan fiduciary of any changes in status. The plan sponsor must determine that the cost of the annuity option is reasonable in relation to the benefits and features provided by the annuity.
Many expect that these relaxed rules will encourage more retirement plans to offer annuities as a default option for participants who do not make their own elections.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether retirement plans should default 401(k) participants into annuity options.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Bloink
Byrnes
Their Reasons:
Bloink: Annuities provide a sound way to offer guaranteed lifetime income for retirees. Retirees who have yet to make their own investment decisions are often simply not paying attention. Of course, plan participants would always be entitled to opt out of the annuity option at any time prior to retirement — and employers would be required to provide notice of their right to do so. If we have to choose a default option for plan participants, annuities seem to be the most effective way to ensure that Americans are protected throughout retirement.
