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Lifetime Income Disclosure: What It Means for You – Part 2

In the first installment of our series on Lifetime Income Disclosure, published on August 30, 2022, we told you that the SECURE Act included three provisions to encourage the adoption of guaranteed lifetime income products:

  • Lifetime income disclosures to plan participants
  • Fiduciary safe harbor for the prudent selection of lifetime income providers
  • Portability of lifetime income benefits

In Part 1, we focused on the lifetime income disclosures and, specifically, how you, as an advisor, can reach out to your clients to help them understand these disclosures and build a better, more trusting relationship with your clients.

If you haven’t read Part 1 yet, you can read it here.  In this final installment of our series, we will focus on two of the other changes made by the SECURE Act.

Emergence of Lifetime Income Benefits Solutions

Lifetime income solutions in defined contribution plans are a hot topic.

By definition, retirement occurs after a person stops working.  And, with most employees covered by defined contribution plans, rather than defined benefit plans, that means that the responsibility for managing a person’s retirement account falls on the retiree, not the employer.

However, most people do not have the knowledge or experience to manage their money. Further, because people are living longer and, as a result, need their money to last longer, many people are facing the real possibility of outliving their retirement accounts.

Enter a Retirement Professional

This is where a retirement professional comes in.  You can help your clients better manage their retirement savings and provide for a more secure retirement.

One way to accomplish that is through guaranteed lifetime income products, which can help mitigate both longevity risk and investment risk.  Lifetime income products can help retirees manage the drawdown of their retirement savings.

In 2019, the SECURE Act included provisions to make lifetime income solutions easier to access and at the same time alleviate the concerns of plan sponsors about fiduciary risk in offering these benefits.

Fiduciary Safe Harbor

Prior to the SECURE Act, many sponsors of defined contribution plans were hesitant to include guaranteed lifetime income products in their plans.  The fear was that the insurance company chosen to provide the product might become insolvent and be unable to provide the benefit.  In 2008, the Department of Labor adopted a rule designed to ease that concern.  However, the 2008 rule did not have the intended effect.

Safe Harbor Provision

As a result, Congress included a new safe harbor provision in the SECURE Act.  The safe harbor provision is designed to protect a plan sponsor from fiduciary liability in the event that an insurer becomes unable to pay benefits.  As long as a plan sponsor follows the procedure outlined in the SECURE Act for selecting a guaranteed lifetime benefit provider, the plan sponsor will not be liable for the provider’s inability to pay benefits.  This new provision should encourage plan sponsors to include guaranteed lifetime income benefit products in their plans.

Lifetime Income Portability

The SECURE Act added lifetime income portability provisions to the Internal Revenue Code.  Prior to the SECURE Act, many plans did not permit guaranteed lifetime income products because they limited the ability of the plan sponsor to change plan administrators.  If the new administrator did not support the product, the participant either had to surrender the product or leave it behind with the old administrator.  This would result in an administrative nightmare for the plan sponsor, which they avoided by not permitting these investments.

The SECURE Act permits both in-service trustee-to-trustee transfers of a lifetime income product to other eligible plans and the purchase of distributed annuities to handle the participant’s accumulated benefit.  This change should encourage plan sponsors to offer guaranteed lifetime income products.

Takeaways

The changes made by the SECURE Act provide you, as a qualified retirement plan advisor, the opportunity to expand your business.  Plan sponsors and participants are going to need help navigating the provisions of the SECURE Act; help which you are well-suited to provide.

In Part 1 of our article, we explained how your expertise is needed to help your clients understand the lifetime income disclosures required by the SECURE Act.  However, you can do so much more.  There is a new emphasis on guaranteed lifetime income products, and most people do not understand annuities.  You have the opportunity to explain to plan sponsors and participants the guaranteed lifetime income stream that an annuity can provide and how it can help them be sure that they will not outlive their retirement income.  With your knowledge and expertise about guaranteed lifetime income products you cannot only guide them through the accumulation phase, but you can also help them navigate the decumulation phase.

By helping employees understand how the cash in their retirement plan can last through their retirement years using guaranteed lifetime income products, you’re also helping yourself. You’ll grow your business with new clients and have a good feeling about having helped them have a better retirement.

We’re Part of the Solution

We in the Pension Division at RMC Group specialize in working with advisors who serve the small plan market.  We can help you market and set up presentations and programs that you can use to explain to an employee what lifetime income disclosures are all about.

In addition, we can help you work with your plan sponsor clients to select the best guaranteed lifetime income product for their plan, as well as helping participants handle the product’s portability issues. As this article has shown, there are many opportunities for you to shine by showing the many benefits of annuities as an important part of an employee’s retirement planning.

Call 239-298-8210 or visit our website at rmcgp.com to discover how we can partner with you to help employees successfully understand what their retirement statements are now telling them.