One year after the SECURE Act addressed a major roadblock to defined contribution executives offering in-plan annuities, some sponsors — as they try to recover from the impact of the coronavirus pandemic — are trying to regain the momentum of investigating if these options make sense for their participants.
The coronavirus played a major role in diverting executives' attention from an already-complex plan design concept. Some recent research suggests that in-plan lifetime income options remain a tough sell to sponsors and to participants. Other surveys cite some interest, but they cannot tell if the intensity of the interest — ranging from "very" to "somewhat" — would forecast action.
The SECURE Act "isn't answering all of the questions and it's not solving all of the problems" for the use of in-plan annuities within DC plans, said Shawn O'Brien, senior analyst for Cerulli Associates, Boston. "It is taking a while for certain product providers and sponsors to get more comfortable."
Signed by President Donald Trump in December 2019, the Setting Every Community Up for Retirement Enhancement Act provided a fiduciary safe harbor for DC plans that offer in-plan annuities if an annuity provider were to fail.
Among other things, the law protects sponsors if they obtain "written representations" from an insurer or other provider affirming their financial health.
Sponsors aren't required to conduct their own evaluations of an annuity provider's financial health. The law allows sponsors to use many criteria in selecting a provider and it doesn't require them to choose the lowest-cost provider.
"We saw a lot of activity in January and February but then everything froze," said Michael Kreps, a principal at Groom Law Group, Washington, describing discussions with clients about in-plan retirement income options.
Although the SECURE Act addressed insurance credit risk, sponsors still must wrestle with issues such as cost and type of products to be offered. "It takes a while to clear all the hurdles," such as whether the cost justifies the usage, Mr. Kreps said.
"It's tough to make plan improvements when you are dealing with furloughs or staying in business" due to the economic impact of the coronavirus, he added.
Larger plans will be more likely to consider in-plan options, Mr. Kreps said.
"We were having a lot of robust conversations until March," said David Ireland, global head of defined contribution for State Street Global Advisors, Boston.
"Then the focus shifted for all retirement plans away from future enhancements." Even under the best circumstances, however, "it's hard work to implement these kinds of solutions," he said.