The Retirement Enhancement and Savings Act of 2018 (RESA) may finally encourage retirement plan sponsors to add annuities to their 401(k) plans. Certain provisions may promote retirement savings by encouraging annuitizations among plan participants.
- Academic research has shown that annuities can help improve retirement outcomes among retirees
- Recent actions in Congress may encourage companies to expand the usage of annuities as part of their defined contribution plans
- Increased adoption of annuities by plan sponsors may help improve the financial security of workers through increased annuitization
Senators Orin Hatch and Ron Wyden recently introduced the Retirement Enhancement and Savings Act of 2018 (RESA) to the Senate Committee on Finance, where they serve as the Chairman and Ranking Member, respectively. The bill covers a wide-ranging set of retirement policy issues, including important provisions that are designed to promote the adoption of annuities in 401(k) plans. These provision address a 2016 report by the Government Accountability Office (GAO) that called for the Department of Labor to establish an annuity safe harbor to “encourage plan sponsors to offer lifetime income options.”
As early as 1965, academic literature has demonstrated the importance of annuities in reducing longevity risk and promoting retirement security. As companies have shifted away from defined benefit pension plans to defined contribution plans, the need for guaranteed, lifetime income through annuitization has grown. A 2015 survey by TIAA-CREF found that “the vast majority of Americans (84 percent) said that having a guaranteed monthly paycheck in their post-career years is important, yet only 14 percent have taken steps to ensure lifetime income with the purchase of an annuity.” Recent contributions to the annuity space include efforts to leverage the behavioral economics to solve the annuity puzzle (read more here). However, because the majority of retirement savings are directed through employer sponsored plans, employers who sponsor defined contribution plans play an important role in encouraging workers to annuitize.
Government Accountability Office (GAO) Report
In 2016, the GAO’s report on titled “401(K) PLANS: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants” recommended that the Department of Labor (DOL) take action to “guide fiduciaries as they consider how the account balances of their participants will translate into financial security in retirement.” The GAO recommended that DOL take action to encourage plan sponsors to add annuity options to their defined contribution retirement plans by establishing an administrative safe harbor that, if adhered to, reduces the liability risk of plan sponsors. In addition, the GAO made recommendations that the DOL encourage plan sponsors to give participants the opportunity to annuitize some of their retirement savings, provide multiple annuity options, and ensure that changing a service provider doesn’t impact accrued annuity balances.
Retirement Enhancement and Savings Act (RESA) Details
In response to the GAO report on the Department of Labor (cited above), Senator Orin Hatch introduced RESA to the 114th Congress. The bill sought to codify many of the GAO recommendations and has reemerged as co-sponsored legislation this year as a part of the 115th Congress. One of the central objectives of the bill is to encourage the 401(k) community to adopt annuities within their plans as a way to increase annuitization among plan participants.
Key parts of this part of the bill include a fiduciary safe harbor for the selection of an annuity provider, a lifetime income disclosure for plan participants, and portability or transferability of lifetime income options. Through the lifetime income disclosure, RESA may help participants adopt a consumption based framework toward their retirement savings (the benefits of which we highlighted in this post). Other provisions such as the fiduciary safe harbor may help encourage large plan sponsors to include annuities in their 401(k) plans.
RESA is supported by industry groups such as the American Council of Life Insurers through an op-ed and strongly endorsed by the ERISA Industry Committee (ERIC), though it should be noted that ERIC opposes the lifetime income disclosure provision. ERIC’s strong endorsement is important because the organization represents the largest industry plan sponsors, providing credence to the assumption that RESA would lead to the adoption of annuity options by plan sponsors.
Blueprint Income Contributions
RESA represents a step by Congress and the private sector to encourage plan sponsors to add annuities to their retirement platforms, thereby leading to greater adoption of annuities among plan participants. Even if RESA becomes a law, however, additional hurdles may remain to widespread adoption of annuities among workers. One operational challenge, cited in both the GAO report and RESA legislation, includes guidance on how a company can transfer annuity contributions to from their current plan administrator to a newly hired one. In addition, plan sponsors will still face hurdles in educating participants about annuities and facilitating the buying process.
Blueprint Income’s platform was created, in part, to address these concerns:
- First, we host annuities from 15+ top-rated insurance companies, thus providing a high-quality marketplace with competitive pricing.
- Second, our innovative Personal Pension, a lifetime annuity that you purchase over time, allows you to annuitize in the same manner that you contribute to your 401(k), eliminating the significant decision-making process currently required to buy an annuity just before retirement.
We believe that our approach to retirement income should serve as a model for how companies could implement annuities within their defined contribution plans. See what buying income slowly over time could look like here:
Personal Pension Builder
Currently, the Personal Pension is only available through Blueprint Income’s website. It can be purchased with regular post-tax, IRA, or 401(k) rollover savings. If you’re interested in making the Personal Pension available to employees within a retirement account, please contact us at [email protected]
Learn more about annuities and retirement planning by signing up for our newsletter.