Assessing the potential impact of the SECURE Act on annuity sales
by Rich LaneMr. Lane is director of individual annuity sales and marketing for Standard Insurance Company. Visit www.standard.com.
Rarely does a piece of national legislation significantly improve the availability of annuities to consumers, but that is what has occurred with the SECURE Act. Though it hasn’t yet been enacted into law, advisors should examine how the proposed legislation would affect annuity sales, while also being prepared to respond to changes should the bill become law. Clients will be looking to you as a trusted source of information to protect and enhance their financial security, so staying current on the details of these evolving policies will be important.
What is the SECURE Act?
At its core, the Setting Every Community Up for Retirement Enhancement Act of 2019 — better known as the SECURE Act — is meant to enhance the retirement savings options of Americans. It aims to increase consumers’ access to tax-advantaged retirement savings accounts and beneficial options like annuities in order to prevent older Americans from outliving their savings.
On May 23, 2019, the U.S. House of Representatives passed the SECURE Act by a vote of 417 to 3, so it very clearly has strong bipartisan support. As of the time this article was written, the SECURE Act is still pending in the Senate.
The bill includes 29 provisions aimed at increasing access to tax-advantaged accounts and would affect numerous rules related to retirement planning. Among the highlights, its goals are to:
- Make it easier and less costly for small businesses to set up and offer retirement plans for their employees;
Encourage small businesses to automatically enroll their employees into their retirement plan;
- Make it safer for employers to include annuities as an option in their retirement plans; and
- Encourage employees to save more money in their retirement plan and ultimately consider choosing the guaranteed lifetime income option in retirement.
The SECURE Act is designed to encourage employers to start offering more extensive retirement plans that many have previously shied away from because they were expensive or difficult to administer. More significantly for those who sell annuities, the bill would give employers a push to add annuities to their employees’ retirement plans.
The SECURE Act’s impact on annuities
In the past, some employers have been uncomfortable exercising their role as a fiduciary and shouldering the responsibility that comes with choosing the best retirement plan options for their workers. Many employers have been reluctant to include annuities among their retirement offerings because they feared being sued if the annuity insurer ultimately proved unable to make the guaranteed payments — something that could potentially happen many years after the affected employees have left the company.
The SECURE Act would help address those concerns through a provision that would protect employers from liability. It would provide a safe harbor such that if the employer took certain steps to verify the financial strength of the insurer at the time that the insurer is selected to offer the guaranteed lifetime annuity, the employer is not liable if the insurer later becomes financially impaired. If the insurer that originally issued the annuity were to become insolvent, employees would be able to seek help from state insurance guaranty associations, which provide a backstop to their benefits up to certain limits, but they would not be able to seek a remedy from the employer.
Additionally, the SECURE Act would require plans to provide participants with a regular periodic notice as to the amount of lifetime income their balance would purchase. This serves two purposes: it encourages employees to save more money for retirement in order to try to replicate the income that they have received from working, and it encourages them to consider choosing the guaranteed lifetime income option in retirement.
It is still to be seen whether these provisions will be enough to encourage more employers to offer annuities, as well as whether they will be enough to encourage more employees to convert their retirement plan balances into guaranteed lifetime annuities. Nonetheless, the measure seems like it would be a great first step toward broadening employees’ access to annuities.
Legislation Benefits by Audience
It’s easy to envision that retirees feel more financially secure when they have sufficient guaranteed lifetime income to cover their living expenses. As workers plan for retirement, many can count on receiving Social Security benefits, some can count on receiving a pension, but most recognize that more money will be needed. The advantage of annuities is that they can also provide guaranteed lifetime income. That’s why the SECURE Act is drafted — to encourage increasing the availability and utilization of annuities.
Employers, employees and advisors alike all would stand to benefit from the SECURE Act. Here are some highlights by audience.
The SECURE Act would make annuities available to a larger number of employees and provide them with more options to enhance or diversify their retirement portfolio.
The annual lifetime income disclosure statements that retirement plan administrators would be required to provide to participants would then encourage employees to contribute more money to the plan and to be aware of the lifetime annuity option.
These disclosure statements would help employees understand in simple terms how much money they could receive each month if their total account balance were used to purchase an annuity. The estimated monthly payment amounts would be for illustrative purposes only, but they would help employees gain a better understanding of what their monthly income might look like when they stop working, while also educating them on the benefits of annuities.
In addition to the relief from legal liability for employers, the SECURE Act would have more substantial benefits for small to midsized companies. It would be easier and quicker for small business owners to set up retirement plans for their employees. These smaller companies would be able to offer more robust retirement savings plans that better meet the needs of a multigenerational workforce and make the employer’s benefits offering more competitive.
For advisors, the benefit of the SECURE Act lies in the fact that the legislation should cause more employers to be interested in setting up a retirement plan, for plans to grow larger as employees contribute more money, and for everyone to need an advisor’s expertise to design the plan well and utilize it properly. It would present advisors an opportunity to showcase their expertise and deepen their relationships with clients.
Annuities Offer Stability for Retirement
It’s important to consider the conditions that have led Congress to consider broadening employees’ retirement options to begin with. Between 401(k) plans and IRAs, many Americans are working toward saving for retirement, but over one-fifth of Americans are saving none of their annual income. And according to the Bureau of Labor Statistics’ National Compensation Survey for 2018, only 54% of full- and part-time workers even participate in a workplace retirement plan — whether defined benefit or defined contribution. As more states and employers struggle under the weight of their pension obligations and look for alternative ways to encourage employees to save, they may increasingly look to annuities as part of the solution.
Clients will always look to you to make sense of their retirement plan options. This can be an opportunity to optimize your selling strategy and include safe options that many employees want. Because of this, annuities are a strong option that will earn clients’ trust and grow your business at the same time. Your responsibility as an advisor includes offering options that are suitable to your clients — options that provide not only growth, but assurance that they won’t run out of money. As you continue to do that, clients will look to you as an authority on their financial decisions. As your counsel drives your clients’ retirement plan success, that in turn will fuel your business success.
1- H.R. 1994, Setting Every Community Up for Retirement Enhancement Act of 2019, June 2019, https://www.congress.gov/bill/116th-congress/house-bill/1994/text