SECURE Act’s lifetime income provisions add clarity and flexibility
The Setting Every Community Up for Retirement Enhancement (SECURE) Act that became law in December 2019, as part of the government spending bill, included several provisions aimed at making “lifetime income” retirement options, like annuities, easier to use for plan sponsors and participants alike. The modifications provide some consistency for disclosures about these products, increase portability of lifetime income assets for participants, and offer safe harbor protections for plan sponsors that offer guaranteed retirement income options.
As many plan sponsors have moved away from defined benefit plans to defined contribution plans, participants have had an increasingly difficult time understanding how their retirement investments will translate into an income stream once they stop working. Lifetime income products like annuities attempt to bring some certainty to that calculation, but they come with their own set of challenges. These SECURE Act changes attempt to address some of those challenges.
Overall, the SECURE Act changes represent a positive step toward making lifetime income retirement products more reliable and accessible for employers and participants alike.
Improved disclosures for lifetime income
Third-party service providers have made inroads in improving the relevant disclosures, but lack in illustrating the monthly payments the participant would receive, if the total account balance were used to provide a lifetime income stream. The SECURE Act instructs the Department of Labor (DOL) to provide a template for a model lifetime income disclosure by Dec. 20, 2020, (one year from the date of enactment). Once that template is finalized, plan sponsors who currently offer defined contribution plans will need to work with their third-party service providers to update the language in their plan disclosures to comply with the new rules.
Increased portability for lifetime income
One challenge for participants in employer-sponsored lifetime income products has been lack of portability. The SECURE Act provides protection if a qualified defined contribution plan (including section 403(b) or section 457(b) governmental plan) ceases to provide a lifetime income investment as an asset. These products are typically offered only by some of the largest third-party service providers and if an employer moved from a provider that offered this option to one that didn’t, participants would lose out on the ability to participate. A provision in the SECURE Act now allows the participant to keep the lifetime income product with the original provider without suffering any penalties or being subject to restrictions on in-service distributions. The SECURE Act would allow the plan to make a trustee-to-trustee distribution of the lifetime income investment in the form of a qualified plan distribution annuity contract within the 90 days preceding the date the investment is no longer authorized without suffering any penalties or being subject to restrictions on in-service distributions.
Plan sponsor safe harbor for selection of lifetime income provider
The SECURE Act also improved on previous efforts to provide safe harbor protections to plan sponsors who contract with third-party service providers to offer lifetime income products in their retirement plans. The new law is derived from the preexisting regulatory safe harbor for the selection of individual account plan distribution providers adopted by the DOL in 2008. However, despite the safe harbor, plan sponsors have avoided providing lifetime income products due to uncertainty and ambiguity around the 2008 safe harbor. The new law provides more clarity to steps that a plan sponsor must take to qualify for protection against liability. To meet the safe harbor, the plan sponsor/fiduciary must engage in an objective, thorough, and analytical search and consider:
- The financial stability of the insurer.
- The cost of the contract by the insurer.
The fiduciary must obtain written representations from the provider that are described in the law and the insurer must undergo specified financial examinations at least every five years.
Technically, the new rules apply for plan years beginning after Dec. 31, 2019. From a practical standpoint, only the disclosure rules would require modifications to plan administration, and the DOL has to draft and issue interim final rules, a model disclosure, and assumptions to be included before plan disclosures can be impacted. The earliest that plan disclosures are likely to be affected will be 2021, as the DOL has that one-year-from-enactment deadline discussed above.
While the disclosures will require some additional work on the part of plan sponsors and third-party service providers, the SECURE Act changes represent a positive step toward making lifetime income retirement products more reliable and accessible for employers and participants alike.
To learn more about how these changes affect your organization’s retirement benefits, please contact your Plante Moran advisor.