Over the past few years, the government has been pushing consumers to use annuity products in their retirement planning. The Treasury Department promoted the use of longevity annuities in 401k plans through new rules back in 2014. Then they made it alright to use target date funds like deferred annuities as a 401k plan default investment later that year. The global retirement planning crisis is due in part to fewer people having company pensions that will pay lifetime income. Annuities create a lifetime stream of guaranteed income payments, but they have to be selected by either the consumer or their 401k plan sponsor. But only 9% of 401k plans are offering a lifetime income option right now for their participants. In “Government Accountability Office pushes DOL to update 401(k) annuity rules,” Investment News’ Greg Iacurci talks about the back and forth happening between these two government offices right now as the GAO tries to get annuity options into more 401k plans.
The Government Accountability Office aides Congress through investigational services. They are asking the Department of Labor to change the rules that 401k plan sponsors have to follow in order to offer lifetime income annuities through their plans. Many providers are too nervous to offer these options because of the fiduciary responsibility that they have to select a “good” annuity provider. The current safe-harbor requirements are likely keeping the other 90% of plan sponsors who don’t offer an income annuity option from giving employees that choice. To follow their fiduciary duties, plan sponsors have to research and determine that the selected insurer will be able to meet all future annuity payments to their employees. Understandably, these plan sponsors aren’t willing to take the risk of betting on these insurance companies for decades of time.
Morningstar Inc. recently determined that the United States is far behind other countries when it comes to providing lifetime income through public policy. This is why the GAO is asking for updates to the safe harbor that will offer some legal relief from the fiduciary standpoint that plan sponsors face if they offer a mix of 401k annuity options to plan participants along with some other stipulations. The DOL responded with a rebuttal that says this call from the GAO will actually hurt consumers and take away necessary protections. They stand by the safe-harbor policy because they say that taking away the fiduciary responsibility would eliminate the inherent protection it provides for plan participants and their beneficiaries. They also don’t think that offering a mix of annuity products is a good idea because it puts too much responsibility on the individual employee to choose an annuity for their plan.
Right now, plan sponsors can outsource the selection of an annuity product to a fiduciary investment advisor, but not all plans are able to access these kinds of services. A DOL representative said that the department would consider making changes based on the GAO’s recommendations, but just in a different way. They did point out that it wouldn’t be happening anytime soon though. A Morningstar representative thinks that the GAO suggestions should be taken seriously because they can be done in a way that both protects consumers and greatly expands their access to annuity products within 401k plans. Although the DOL made it clear that the GAO’s current recommendations are not their first choice for making 401k annuity changes, it’s possible that public opinion could force them to reconsider. There will likely be an open comment period in the future if and when the DOL considers changing their rule.
Written by Rachel Summit