In-Plan Annuities: A New Twist on the Traditional Pension Model

Kirsch CPA Group

Mar 03, 2022

It’s common for employees who are nearing retirement to be concerned with whether their savings will last through their senior years. Those worries are mounting today. With soaring inflation, rampant supply chain shortages and lackluster consumer sentiment, many people are uncertain where the markets are heading. Even those with healthy 401(k) account balances may feel ill-equipped to manage those funds throughout their retirements. A few bad investment decisions, or taking too much out too soon, can spell disaster.

Simple Solution

A pension takes away those worries by providing a guaranteed income stream over the life of its owner and beneficiary. Although many employers no longer offer traditional pension plans, life insurance companies typically sell annuities that can provide a rough equivalent.

Annuities have been widely available for many decades. However, the price of an annuity that will generate enough monthly income to fund a significant portion of your retirement income is steep — especially in today’s low interest rate environment. Plus, shopping for an annuity can be overwhelming for the financially unsophisticated; many people wind up paying too much or choosing an annuity with unnecessary features.

But there’s some good news: It’s now easier for employers that offer 401(k) plans to help employees, even before retirement, navigate the annuity-selection experience with greater confidence. Here’s what you should know.

Lower Liability

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law in December 2019, made important changes to the laws that affect employers offering retirement benefits. It includes a provision that relieves employers of some of the potential liability associated with incorporating an annuity provision into their 401(k) plans. The financial services industry is only now building up momentum to help employers take advantage of this provision.

Under prior law, employers were theoretically liable for financial harm caused to any of their retirees who swapped accumulated 401(k) funds for an annuity contract offered under the umbrella of that 401(k) indefinitely into the future. This could cause problems for an employer many years after the annuity provider had been selected.

Under the SECURE Act, an employer’s liability is basically limited to a scenario in which it made a poor choice when selecting the annuity provider based on information that could have been obtained by the employer at the time the decision was made. That change put the annuity provider selection decision on the same legal footing as the selection of other financial services, such as traditional 401(k) investment options.

In both cases, the plan sponsor’s fiduciary obligation now is expected to carefully vet its vendors when selected and to continue doing so as long as they’re providing services. If the employer determines that a service provider — whether a mutual fund company or an annuity issuer — no longer lives up to its original quality and security criteria, it needs to end the relationship. But the employer can’t undo a retiree’s annuity purchase made many years ago from an insurer that subsequently fell on hard times and was dropped as an optional annuity provider.

Vetting Vendors

Given the change in legal liability, some employers may now be willing to offer in-plan annuity options. Financial service companies, including BlackRock and State Street Global Advisors, have teamed up with insurers to offer annuities for large companies’ retirement plans.

Smaller employers have other opportunities to make such arrangements. For example, a consortium of financial services companies called “Income America” announced an annuity option last year for retirement plans sponsored by smaller organizations.

As employers consider adding annuities to their 401(k) plan options, U.S. Department of Labor regulations require, among other things, that they:

Analyze annuity provider candidates objectively and thoroughly,
Assess their ability to make all future payments promised under the contract, and
Without automatically picking the least expensive option, consider the total costs involved, including commissions and fees, relative to the benefits and administrative services the plan offers.

If an employer doesn’t possess the skills or resources to satisfy those requirements, the regulations call for it to secure appropriate expert guidance from external sources.

We Can Help

Is it time to add an annuity option to your organization’s 401(k)? Kirsch CPA Group can help you evaluate this decision and find a credible, cost-effective annuity provider that offers the optimal solution for your plan.