401(k) Specialist Issue 1 - 2021 - 36

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The SECURE Act was passed in December 2019,
paving the way for substantial changes in the retirement
industry. A few months later, COVID-19
struck the United States, and suddenly, everyone had
much bigger priorities than retirement planning.
" Most of 2020 was lost to a chilling effect of
people saying, 'Well, this is important, but there's a
lot of other urgent issues that need to be addressed
now,' " Sri Reddy, Senior Vice President of retirement
and income solutions at Principal Financial
Group, said.
Many businesses had to focus just on their
day-to-day operations to stay afloat, Ralph
Ferraro, Senior Vice Ppresident of retirement
plan products and solutions at Lincoln Financial
Group, said. Maintaining sales, covering
expenses, keeping employee health and morale
up, and making sure employees could be paid
were more important to plan sponsors than
deciding if maybe they should think about
introducing annuity solutions to their defined
contribution plans.
As businesses look forward to a post-vaccine
reality, there may be more appetite for
considering plan innovations that increase
income options for participants.
" I'm really hopeful that now with the
introduction of vaccines, some level of normality,
that both the SECURE Act and the
innovation will proliferate to annuities, and
in-plan offerings will start to happen more
robustly this year, " Reddy said.
Ferraro is also optimistic about the
impact the SECURE Act will have on
retirement outcomes, particularly around
annuity adoption.
" The safe harbor for plan sponsors for the
selection of an annuity provider has really
lifted some of that [fiduciary] burden ... in
regards to having to evaluate these types of
solutions, " he said.
SECURE Act
Principal's Reddy said the SECURE Act
" was meaningful for a number of reasons, "
ISSUE 1 2021 | 401kSpecialist.com
" When rates are this
low, these types of
products also start
becoming more
expensive to offer. "
but in terms of supporting lifetime income
for retirement plan participants, there are
three key elements.
One is requiring lifetime income illustrations.
" That's a good starting step because
you want people to reorient from thinking
about their 401(k) balance, to thinking
about what that means and how does that
translate to lifetime income, " he said.
Portability is another valuable benefit
for participants, he said. " If your employer
chooses a different provider, or your recordkeeper
no longer offers a product, that
would become a distributable event for a
rollover to an IRA, so that benefit that you
paid for could sustain itself. "
Creating a safe harbor for annuities
was important, Reddy said, " because plan
sponsors often didn't understand what their
fiduciary responsibility was with insurance. "
The SECURE Act absolves plan sponsors
of liability if an annuity provider they select
later becomes insolvent. That's particularly
important in today's low-interest-rate environment,
Reddy said.
" This is something that I don't know if
your readership fully understands, but when
rates are this low, these types of products
also start becoming more expensive to offer.
There's a direct correlation between interest
rates and insurance companies' ability to
hedge and provide these guarantees 10, 20,
30 years out, " he explained.
Improving Outcomes
" You have to offer people the ability to
participate; give them access, " Reddy said.
Lawmakers can do that by simplifying the
administrative burdens for plan sponsors,
like with Pooled Employer Plans (PEPs), he
continued.
" In a nation where we're forced to save
on our own, if you have to plan for the
unexpected tail events -will I live to be 90
or 95?-you have to either save 20% to 25%
more, or you have to live on about 20% to
25% less income every month. Why do that
when I can pool that risk [and] offer you
a vehicle, whether it's a deferred income
annuity or a life-type solution, that can
immunize your tail risk so that you only
have to worry about managing money for a
predefined period of time? " he said.
Principal commissioned a study in 2019,
conducted by Michael Finke, professor of
wealth management, and Wade Pfau, professor
of retirement income, at The American
College. The study found income annuities
in retirement portfolios helped retirees get
the same or higher income as an investments-only
approach, with lower risk of
outliving savings.
" Annuities are essentially a pension
provided by a private company, " Finke said
in a statement announcing the results of
the study. " If you're the type of retiree who
wishes they had a pension, you can buy
one through an income annuity that will
provide a regular income as long as you live.
If the reason you saved for retirement was
to provide a secure lifestyle, there's no more
efficient way to create lifetime income that
through an annuity. "
Annuity Misconceptions
" We need to start with basic education.
Most participants either don't know what
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401(k) Specialist Issue 1 - 2021

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