A New Opening For Annuities
Another annuity gate has opened, and it’s big news for just about anybody in the annuity business.
On Friday, the Department of the Treasury (DOT) and the Internal Revenue Service (IRS) released new guidance that DOT said is “designed to expand the use of income annuities in 401(k) plans.”
Specifically, Notice 2014–66 clears a path for plan sponsors to include deferred income annuities (DIAs) in target date funds that are used as default investments in defined contribution plans like 401k(k)s. Default options are the investment options to which the sponsors direct contributions made by 401(k) participants who are automatically enrolled in a plan. (Note: Automatically enrolled participants can move to other plan options if they wish or even opt out of the plan.)
The option is voluntary for plan sponsors and participants. But it’s still a big deal for annuities — and for plan participants — because when employers do offer the feature, plan participants will see the DIA. That will trigger discussion about what it is, and that will increase awareness about annuities in general and about planning for guaranteed retirement income in particular.
A common criticism of defined contribution plans is that, although they are great ways to help workers save for retirement, they do not help workers turn those savings into a regular income stream that replaces their former paychecks once retired. The annuity industry has developed rollover IRA annuities as a way to meet this need outside the plan environment. But now, there will be annuity options inside the plan environment too. Employees will be able to use a portion of their savings to purchase guaranteed income for life while retaining other savings in other investments, according to DOT.
Not all plans will offer a DIA in this matter, not all plan participants will elect it, and not all money will go into it. So the rollover market will likely continue. Those in the rollover business might even find their work becoming a bit easier, thanks to the heightened awareness about DIAs that will surely arise.
Worth noting is that this isn’t the only income annuity move that the government has made. In July, DOT and IRS issued final rules on using longevity annuities (which are DIAs that begin payouts at advanced ages) in 401(k)s and IRAs. These are the qualified longevity annuity contracts (which the industry quickly dubbed QLACs). Here too, the goal was to, as DOT put it, “encourage lifetime income and enhance retirement security.”
You can read highlights on the new guidance regarding DIAs in default investments in the DOT press release here.
Cathy Weatherford, president and chief executive officer of the Insured Retirement Institute, called it right when she said in a statement: “…the Treasury Department is acknowledging the important part annuities have in helping Americans attain financial security in retirement.”
Some onlookers might think Weatherford’s comment is “just industry talk.” They would be wrong. In DOT’s release, a senior advisor to the DOT secretary, J. Mark Iwry, said: “By encouraging the use of income annuities, today’s guidance can help retirees protect themselves from outliving their savings.”
In the coming days, weeks and months, someone is bound to take issue with something in the guidance. But at least for today, this is a time for annuity professionals to savor the “love” that has come the DIA’s way.