The SECURE Act Brings New Opportunities for Annuities

Last December, the new SECURE Act was signed into law by President Trump after receiving bipartisan support in Congress, spurring significant changes to annuity regulations and expanding the potential for annuities in retirement planning. As the industry grapples with the opportunities and limitations brought by the act, advisors should take heed of these changes and reevaluate the best path forward for clients.

Addressing Fiduciary Concerns

One goal of the SECURE Act is to help relieve fiduciaries’ responsibilities when including annuities as offerings within 401(k) plans. Prior to the SECURE Act, group offerings were limited, and some of the lifetime income annuity options that could potentially fit well into retirement plans were mothballed. However, the SECURE Act now allows group retirement plans to include deferred income annuities and a variety of deferred annuities that provide both single and joint-spousal lifetime income riders. This is a substantial legislative victory for annuity providers and supporters of lifetime income retirement options, and the insurance industry will likely step up to the plate with renewed product development. 

One significant area the SECURE Act leaves unaddressed is the solvency of issuing annuity carriers. Many fiduciaries are not aware how statutory capital reserves work for annuity guarantees: each quarter, the present value of the lifetime income guarantee is defined actuarially by the carrier. While exact reserve minimums vary by state, approximately $1.05 per dollar of guaranteed income must be held in cash equivalents by annuity carriers to ensure they can keep their financial promises. This obligation continues even if carriers become insolvent. 

Finally, under the new rules, fiduciaries will not be required to select the lowest-cost annuity product available for their plans. Instead, they can meet their fiduciary requirements if they choose an annuity provider in good standing with state regulators. While they will not be required to conduct full due diligence reviews on products and providers, it is still the most ethical course of action.  

Changes to Retirement Distributions

Advisors should pay close attention to see if institutionally priced lifetime income guarantees become competitive with individual IRA offerings. In the past, individual offerings often outcompeted group institutional offerings. Our firm has been focused on these pricing issues since 2008. Some self-directed single employer/employee plans have allowed such lifetime income guarantee offerings to be placed inside the plan, and these products have been available for pricing comparison. This could mean individual offerings remain competitive for IRA rollovers, even if the new SECURE Act allows these options inside the plan.

The second primary impact of the SECURE Act involves changes to IRA distributions, including the elimination of stretch IRA options for future non-spouse beneficiaries – this applies to annuities included in retirement plans. Unless an annuity made payments before the enactment date of the SECURE Act (Jan. 1, 2020), or is covered under the grandfather rules as an irrevocable election before 2020, non-spousal beneficiaries will have more restricted options when inheriting annuity policies.

Newly-issued or current annuities without a definitive, irrevocable payout election would not fall under the grandfather rules. Unlike before the SECURE Act, the ability of future annuity contracts to pay out over the lifetimes of two non-spousal beneficiaries will only remain possible if the non-spousal individual qualifies as an eligible, designated beneficiary. Under the SECURE Act, an eligible, designated beneficiary is either disabled or chronically ill (as defined by the IRS), an IRA owner’s minor child or any individual who is no more than 10 years younger than the IRA owner. If the non-spousal annuitant is within the 10-year age range, the annuities could still be placed for siblings and significant others. Annuities paying out to the surviving spouse will also remain exempt from these new rules. 

Grandfathered annuities under the SECURE Act could continue to pay for the lifetime of two people without the above restrictions. Examples of annuities that may be grandfathered are single premium immediate annuity, or a deferred income annuity already in payout.

Advisors should note that, moving forward, annuities sold with joint non-spousal beneficiaries in IRAs might not have the endorsement provisions needed to adhere to new 10-year distribution rule. New annuity provisions will need a cash-out or modification feature to follow the new regulations. This could be a real issue for some annuities already inside IRAs if their owner has not passed away and the joint-annuitant payee is a non-spouse beneficiary. Advisors working with such annuity policies should ensure current contracts have a cash-out endorsement for annuities sold after the SECURE Act effective date.

The SECURE Act is not a perfect change or enhancement for annuity options. However, it expands the opportunities to provide annuity-guaranteed lifetime income options to more retirees through standard retirement options. The regulations introduced by the law will enhance future product development possibilities and spur fresh strategies for the incorporation of annuity options into employer-sponsored retirement plans.

Curtis V. Cloke is an award-winning retirement expert and Adjunct Professor of The American College. Curtis is a renowned industry speaker and workshop educator with over 28 years of experience in retirement planning. Curtis is a 21-year Million Dollar Round Table member with 13 Top of the Table and 2 Court of the Table qualifications. In 2009, he was honored as a top-five finalist for Advisor of the Year by Senior Market Advisor magazine. Learn more at CurtisCloke.com. By joining and engaging with industry peers via associations like MDRT, you can keep your skills at the top of their game.