By Ian Berger, JD
There are three new provisions in the recently enacted SECURE Act designed to promote annuities in company savings plans. That explains why insurance companies lobbied so hard for passage of the legislation. The three provisions are:
- New protection for plan sponsors who want to start offering annuities.
- New options for participants to keep their plan annuity investments if the plan stops offering annuities.
- A new requirement that benefit statements show annuity illustrations.
Today, we’ll discuss the first of these three changes. A future Slott Report will tackle the other two.
According to the Plan Sponsor Council of America, less than 10% of 401(k) plans now offer annuities. The reason often cited for this is that companies are afraid of being sued. Plan sponsors are considered fiduciaries under ERISA and must act “prudently.” Suppose a plan fiduciary chooses an insurance company to provide 401(k) annuities and that carrier subsequently goes belly-up and can no longer make annuity payments? In that case, the unhappy annuitants could sue the plan sponsor under ERISA.
At the same time, too few workers have enough income to last their retirement. Instead, many participants squander their savings as soon as they leave the plan (or even earlier if the plan allows in-service withdrawals). And, since most workers these days aren’t covered by traditional pension plans, they cannot rely on the retirement income those plans provide.
The new law creates a new ERISA standard that protects companies from liability if the annuity provider is unable to meet its obligations. When selecting an annuity provider, plan sponsors must conduct “an objective, thorough and analytical search” of potential annuity providers taking into account (1) the financial capability of the candidates and (2) the cost of the contracts offered.
But this standard should be easy to meet since companies only need to get written representations from insurance companies that they are in good standing with state regulators. The plan sponsor is not required to do its own investigation. The SECURE Act also says that companies are not necessarily required to select the lowest cost contract offered.
Because of this change, any problems employees have with their annuity payments will now have to be taken up with the insurance company – not the employer.
This provision was effective December 20, 2019, the date the SECURE Act was signed into law.