What You Need to Know About Annuities and the SECURE Act
Annuities are now an option for your 401(k), thanks to the SECURE Act. Is one right for your retirement savings plan?
Back in late 2019, in what now feels like a decade ago, news came out of Washington of the passage of the SECURE Act. Somewhat buried in a busy news cycle, the passage of this legislation was applauded by consumer groups and financial institutions alike for its changes to retirement account rules.
Without going into too much detail, the SECURE Act:
- Pushed up the age in which retirement plan participants must take a required minimum distribution (RMD) from 70½ to 72.
- Got rid of the age limit for IRA contributions.
- Granted 401(k) eligibility to long-term part-time employees.
- Made it easier for small-business owners to offer their employees retirement plans, including offering the owners tax credits as well as a way to offer and administer plans in a more economical and easy manner.
- Mandated that, with some exceptions, if you are a beneficiary of a retirement account and you were not a spouse, you must empty that account 10 years from the year of death of the owner.
- Made it easier for new parents to access their retirement accounts by removing penalties for some early withdrawals.
- Made it easier for 401(k) plans to offer annuities as an option in their plans.
If you have read any of my previous articles, you know that one aspect I continually focus on is the importance of ensuring an ongoing stream of income within retirement. There are countless risks that come up in retirement that can cause major headaches (or much worse) if not accounted for during the retirement planning process. So, seeing that employer-sponsored plan participants now have access to selecting annuities as one of their plan options gives me great optimism. Millions of Americans now have the ability to add protected and ongoing income to their retirement finance plan.
The even better news is that this is something that Americans are eager to learn more about. A recent study* from Allianz Life uncovered the following:
- 73% of employer-sponsored participants would consider an option that offers guaranteed income for life in their plan if available.
- 65% of employer-sponsored plan participants stated that market volatility caused by COVID-19 has increased their interest in adding an option that offers guaranteed lifetime income into their plan.
- 60% of employer sponsored plan participants would consider adding an annuity to their plan if available.
Employers need to also take note as:
- 77% said providing an option for lifetime income within their plan would demonstrate their employer has a vested interest in their retirement readiness and well-being, and 65% also said this option would increase their loyalty to their employer.
While it has not happened overnight, more and more insurance carriers are now working with plan sponsors and their plan consultants to begin offering annuities for plan participants. So, the good news is that there is a new option. But the bad news is also that there is a new option. Wading through retirement plan options can admittedly be overwhelming.
Here are three tips to help decide if selecting an annuity as part of your 401(k) is something to consider:
- There are many risks that come with retirement, including: inflation, increasing health care costs and longevity. (Yes, longevity. Retirement can last decades, and you need to plan as if this will be the case.) Annuities can serve as an added layer of protection as a supplemental source of guaranteed income beyond what you will get from Social Security. If you are nervous about spreading out your funds to last through retirement, annuities can potentially play a key role in meeting that need.
- Selecting an annuity as a retirement plan option can actually work in concert with your other investment plan selections. Some annuities are unique in that they offer the potential for growth, so you can still benefit from market gains. Yet some also offer downside protection, so you have a level of protection when the market drops. Let your other investments take on the risk needed for larger growth potential and consider annuities to help protect a portion of your retirement savings. But always keep in mind, annuities should not be your only investment, as greater risk is needed for greater potential returns.
- The annuity is only as good as the company offering it, because they back the guarantees offered on their product. Plan sponsors will be doing their due diligence to offer the best annuities, and insurance companies will be putting forth their most innovative and flexible products. So, the annuity product offered by your plan is likely to be much different than the annuities your parents may have had. All of this said, do your own homework. Data on the strength and stability as well as ratings and claims paying abilities of insurance carriers is readily and publicly available. You want a company that has been around a long time and will be around for you for years to come.
For many, an employer-sponsored plan is their primary method of planning for retirement. In fact, in the Allianz Life study, 7 in 10 Americans expect that most of their retirement income will come from money they have from employer-sponsored plans. The SECURE Act was designed to help address these exact needs and put Americans in a better position to attain their retirement goals. Careful planning and consideration of the new options now available can help set you up for a longer and more financially stable retirement.
*Allianz Life conducted an online survey, the Q1 2021 Quarterly Markets Perception Study, in February 2021 with a nationally representative sample of 1,005 individuals age 18+ in the contiguous U.S.
About the Author
Vice President, Advanced Markets, Allianz Life
Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.