Lifetime income (LTI) strategies, such as target income payout funds or annuities within company-sponsored retirement plans, are designed to help investors plan for and manage their accumulated wealth after retirement. However, these strategies have not yet been widely adopted by plan sponsors.[i] Plan sponsors evaluating options for plan participants may want to consider the following potential benefits of incorporating LTI strategies into their plans.
LTI Strategies Help Participants Plan for an Unknown Retirement Period
With life expectancy trending higher year-over year, some retirees may struggle to make their retirement dollars last.[ii] Lifetime income options offer plan participants an option other than receiving a lump-sum payout of retirement plan dollars when they retire. This, in turn, can help retirees manage their income and spending. Having more certainty around available income may allow some retirees to spend more freely than they otherwise would, while it may cause others to take a more cautious approach by necessity.
LTIs Do Not Depend on a Retiree’s Ability to Manage Money
When a plan participant elects an LTI offered as an option in their company-sponsored retirement plan, they are effectively hedging the risk that they may be unable to manage their own finances during their retirement years. By providing a fixed, minimum level of income to the retiree after retirement, the LTI strategy can help the retiree and his or her spouse in the event they later experience diminished capacity.[iii]
Annuity Contracts Are Insured by the State Guaranty Association
Some plan sponsors have indicated they are hesitant to choose LTI options in part, because of their fiduciary risk if the annuity issuer was to fail.[iv] As insurance products, annuities are regulated by each state and insured by state-specific guaranty associations.[v] This means that if the insurance company issuing the annuity were to become insolvent, at least a portion of the participant’s or retiree’s annuity amount would be protected.
Plan Sponsors Have Safe Harbor Protection under the SECURE Act
With the adoption of the SECURE Act in 2019, plan sponsors can now avail themselves of a safe harbor when choosing LTI strategies. Plan sponsors who have conducted sufficient due diligence in the annuity marketplace and who comply with the Act’s requirement to provide the newly-required “lifetime income disclosure” to participants have liability protection against claims they breached their fiduciary duties in selecting an annuity for the plan’s LTI option.[vi] Of course, selecting an LTI option still requires
plan sponsors to exercise due diligence and care, but assuming they do so, they should not be liable for participants’ losses.
In-Plan LTI Benefits are Now Portable
Another potential roadblock for including LTIs in retirement plans was also addressed in the SECURE Act which made in-plan LTI benefits portable. This means that when plan sponsors change record-keepers, they no longer need to decide whether to terminate the LTI product or leave it in place, essentially requiring two record-keepers for plan participant accounts invested in the LTI. A provision of the SECURE Act allows for in-service trustee-to-trustee transfers for LTIs.[vii]
For plan sponsors who may have considered LTIs prior to the adoption of the SECURE Act, these changes may necessitate a second look. Work with your plan’s financial professional to review investment options, including LTI strategies.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
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[i] https://www.napa-net.org/news-info/daily-news/lifetime-income-strategies-still-struggling-gain-traction [ii] https://www.cdc.gov/nchs/data/hus/2017/015.pdf [iii] https://www.actuary.org/sites/default/files/files/Risky-Business-Retiree-Lifetime-Income-Choices-and-Considerations.pdf [iv] https://www.brookings.edu/blog/up-front/2019/07/24/encouraging-lifetime-income-in-401k-plans/ [v] https://www.acli.com/Industry-Facts/Guaranty-Associations [vi] https://www.morganlewis.com/pubs/2020/08/dol-issues-interim-final-rule-on-lifetime-income-illustrations [vii] https://www.asppa-net.org/news/understanding-secure-act%E2%80%99s-lifetime-income-provisions
Sources
https://www.napa-net.org/news-info/daily-news/lifetime-income-strategies-still-struggling-gain-traction
https://www.cdc.gov/nchs/data/hus/2017/015.pdf
https://www.actuary.org/sites/default/files/files/Risky-Business-Retiree-Lifetime-Income-Choices-and-Considerations.pdf
https://www.acli.com/Industry-Facts/Guaranty-Associations
https://www.brookings.edu/blog/up-front/2019/07/24/encouraging-lifetime-income-in-401k-plans/
https://www.morganlewis.com/pubs/2020/08/dol-issues-interim-final-rule-on-lifetime-income-illustrations
https://www.asppa-net.org/news/understanding-secure-act%E2%80%99s-lifetime-income-provisions