401(k) plan annuities might be right around the corner for many participants. New legislation under consideration on Capitol Hill is aimed at increasing access to lifetime income products in 401(k) plans. Titled the Lifetime Income for Employees (LIFE) Act of 2022, the proposed bill would allow retirement plan sponsors to use annuities as qualified default investment alternatives (QDIAs).
According to a recent ThinkAdvisor article, the bill would allow a portion of participant contributions to be defaulted into an annuity for those participants who have not made investment selections. Growing numbers of participants rely on QDIAs for their retirement investment strategy. However, they also erroneously believe that these investment options provide a guaranteed income in retirement. The current reality is that most QDIAs do not accomplish that.
The LIFE Act builds on lifetime income provisions introduced in the Setting Every Community Up for Retirement Enhancement (SECURE) Act enacted in early 2020. The SECURE Act safe harbor limits plan sponsors’ fiduciary liability when it comes to selecting an annuity provider. Previously, plan sponsors were on the hook for the long-term solvency of the insurers providing the annuity; now, they are able to rely on information from state insurance regulators to meet their fiduciary obligation.
The new proposed LIFE Act would amend requirements in the current QDIA safe harbor that does not allow employers to benefit from the safe harbor if they offer annuities as a QDIA. Updating the QDIA safe harbor in the LIFE Act is designed to encourage more employers to use annuities as their default investment offering in their plan. Doing so will enhance retirement readiness and simplify participants’ ability to transform their savings into a guaranteed lifetime income stream in retirement.
Under the LIFE Act bill, “current QDIA safe harbor regulations would be amended to allow, but not require, a QDIA to include a limited investment – up to 50% – in a non-liquid annuity component, which provides a guaranteed return on investment,” according to ThinkAdvisor. As proposed, plan sponsors wouldn’t need to update their existing QDIAs if the LIFE Act becomes law.
Employers may consider incorporating lifetime income products into their retirement plans as a way to offer a more competitive benefit and potentially make it easier to recruit and retain talent in today’s challenging labor market. The LIFE Act would update existing regulations to reflect innovations in lifetime income products and make it easier for employers to offer them in retirement plans. Expanding access to 401(k) plan annuities as lifetime income products can also help participants. 401(k) plan annuities can clarify for plan participants how to transform their savings to a predictable income stream in retirement. 401(k) plan annuities may motivate participants to increase their savings and feel more confident about the future.
