Annuity products under the SECURE Act

Executive summary

In early 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was passed. While the act included groundbreaking changes for the retirement industry to make saving simpler and accessible to all Americans, it quickly took a backseat to the coronavirus pandemic. This legislation has created the potential for the retirement industry to better align itself with the new needs of participants and retirement plan sponsors alike.

As plan sponsors have moved away from traditional pension plans, participants have found it difficult to properly manage their account balances and plan distributions on their own. The SECURE Act aims to address this issue and help plan sponsors offer solutions to their participants that will lead to predictable lifetime income. While the SECURE Act covered many different plan types and specific provisions, the recent attention to annuities has industrywide implications. These implications include:

• Portability of lifetime income options:¹ Prior to the SECURE Act, the removal or replacement of a lifetime income investment option was a cumbersome process. The plan sponsor had limited options of either charging fees to the participant to discontinue the lifetime income option or maintain a relationship with the annuity provider outside of their plan, which can be very difficult. After December 31, 2019, due to the SECURE Act, an annuity can now be transferred in a direct trustee-to-trustee exchange between qualified plans (or between a qualified plan and an individual retirement account [IRA]) if the lifetime income option is removed from the original plan’s investment options.
• Fiduciary safe harbor for selecting lifetime income providers:¹ Retirement plan sponsors can now satisfy their fiduciary obligations in choosing an annuity provider by conducting an objective, thorough, and analytical search and evaluation of potential annuity vendors.

Given these changes to the retirement and annuity marketplace, Deloitte Consulting LLP (Deloitte) conducted a survey of defined contribution participants² to examine their willingness to invest in an annuity product and general perceptions regarding lifetime income. The key findings of our survey are as follows:

• There is a lack of understanding of what an annuity is and its potential benefits—primarily for participants age 35 and below. Survey respondents had positive perceptions of a product that had lifetime income potential, but when presented with the term “annuity,” their response differed.
• Simplicity is better. Most survey respondents preferred a more simplistic investment structure in terms of guarantees, fees, and portability.
• There is a large market that has been underserved. More than 85% of survey respondents have never invested in an annuity product (as far as they are aware), and more than 60% of respondents would be willing to transfer their balance to a product or solution that provides a stable monthly payment.

For more details on our survey results as well as implications to retirement providers and plan sponsors, please download the full article via the above link.