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The Slow March Of Annuities Into 401( k) s
What are the structural barriers keeping annuities out of retirement plans? By Ben Mattlin
ACCORDING TO EXPERTS, ONE OF THE MAIN SELLing points for annuities is that they can provide a sort of personal pension that cannot be outlived. No other investment can make that claim. Yet the anticipated arrival of annuities within employersponsored retirement plans largely hasn’ t happened. Given the need, could that change? The potential market for guaranteed retirement income is vast.“ Nearly two-thirds of Americans fear running out of money in retirement more than they do death,” says Jim Szostek at the American Council of Life Insurers in Washington, D. C.
Nevertheless, last year barely 40 % of employer-based retirement-plan sponsors said they had decided to add an in-plan annuity to their 401( k) s, or were“ actively considering” it, ac- cording to data tracker LIMRA. The majority said they were“ unlikely” to add one, citing the expense of the products or saying annuities were too complicated, resource-intensive, hard to explain to employees or inflexible.
“ The [ annuity ] industry is addressing these hurdles in a variety of ways,” says David Blanchett, Lexington, Ky.-based head of retirement research at PGIM, the investment management group of Prudential.“ I definitely think we’ re going to see more lifetime-income annuities in plans in the future, but it’ s the rate of growth I’ m just not sure about.”
The History Decades ago, defined-benefit pension plans provided retirement security. But over the past 50 years or so, most pension plans have been replaced with defined-contribution plans such as 401( k) s, which don’ t guarantee lifetime income.
Adding annuities to the menu of what’ s available in 401( k) s would fill the gap, advocates say, and give retirees peace of mind. So why hasn’ t this solution caught on?
The boosters for in-plan annuities got help in 2019 when the Setting Every Community Up for Retirement Enhancement Act( also known as the SECURE Act) made it easier for employers to offer the products. The legislation extended“ safe harbor” provisions, essentially protecting plan sponsors from liability in case annuities defaulted.
Then, in 2022, a bipartisan group in the U. S. House of Representatives introduced the Lifetime Income for Employees( or LIFE) Act to expand on the SE- CURE Act’ s safe-harbor allowances, furthering the compatibility of annuities in 401( k) s.( As of this writing, it hasn’ t passed yet.) Also that year, the SECURE 2.0 Act created tax credits and other incentives for small employers to start offering 401( k) plans, potentially bringing in-plan annuities to more workers.
But the pandemic stalled the momentum, says Brendan McCarthy, head of retirement investing at
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