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Add Annuities to Company Retirement Plan?- Secure Act makes it easier

Add Annuities to Company Retirement Plan?- Secure Act makes it easier

| June 29, 2020
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Secure Act. Plan sponsor opportunity – Add annuity options. With proper advice.


New Incentive to Offer Savings Plan Annuities

The SECURE Act creates a new ERISA “safe harbor” that, if met, shields the sponsor from liability with respect to participant losses if the insurer is unable to pay the full benefits when due.

Example 1: XYZ Widgets sponsors a 401(k) plan that offers various mutual funds. The plan requires participants to take their account balance in a lump sum when they terminate employment.

XYZ wishes to add annuities as a new option for ongoing participants, and to allow outgoing participants the option of purchasing an annuity contract when they terminate. In selecting an insurance carrier to provide annuities for both purposes, XYZ satisfies the SECURE Act safe harbor and picks Goliath Insurance Company.

Seven years later, Goliath goes belly-up and is unable to pay its annuity holders. Those unhappy annuitants cannot come after XYZ to recover their losses.

Ask your advisor, or call me for help.

The SECURE Act safe harbor requires fiduciaries to conduct “an objective, thorough and analytical search” of potential annuity providers taking into account (1) the “financial capability” of the candidates and (2) the cost of the contracts offered.

Plan sponsors can satisfy the “financial capability” prong by simply receiving written representations from insurance companies that they are in good standing with state regulators. The company is not required to do its own due diligence.

The new law makes clear that a plan sponsor is not required to select the lowest cost contract. Rather, it may also consider other features of the contracts being offered and attributes of the candidates being considered. This provision was effective December 20, 2019.

New Portability Options for Company Plan Annuities

A separate provision of the new law is designed to further encourage company plan sponsors to offer annuities as an ongoing option. Congress believed that plan sponsors were reluctant to offer annuity products not only because of potential fiduciary liability, but also because of uncertainty if the company changes providers or eliminates the annuity option altogether. This could easily happen if the administrative burden of offering annuities becomes overwhelming or if only a few participants take advantage of the annuity option.

Without relief, plan participants who had invested their savings plan funds in annuities would be required to change their plan. In addition, participants could be saddled with termination penalties, surrender charges or other fees upon liquidation of the annuity.

 Finally, participants often cannot get their annuity out of the plan because of restrictive IRS company plan distribution rules.

To accomplish this, the SECURE Act adds a new distributable event for 401(k), 403(b) and 457(b) plans.

Consider if adding an annuity option could help your participants and improve your company retirement plan benefits for your employees.

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