Guaranteed Lifetime Income will play a crucial role in Next Generation retirement solutions.
The changing landscape is resulting in plan sponsors' desire to evolve their plans to become focused on meeting better retirement readiness outcomes for their participants. As this occurs, guaranteed income will need to play an important role, helping drive better financial wellness, higher likelihood of retiring on time, and improved workforce dynamics.
As a pioneer and market leader in retirement income, Prudential has more than 7,000 plans that have adopted our guaranteed income solution. This provides us with keen insight into the positive impact of guaranteed income.1
Now that the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE ACT) has become law, it will make it easier for plan sponsors to offer in-plan guaranteed lifetime income solutions to their participants.
To help you understand the impact of the SECURE Act, here are some common questions and answers on this important topic.
How does the SECURE Act impact lifetime income solutions for plan sponsors and participants?
It is the first truly significant piece of retirement legislation since the passage of the Pension Protect Act in 2006 and the QDIA regulation in 2007.
The passage of the SECURE Act brings with it very important provisions: increasing access to retirement plans, improving retirement savings, and protecting against longevity risk by making it easier for workers to convert savings to retirement income that cannot be outlived. These provisions will substantially improve the retirement readiness of millions of Americans. Its provisions increase employees’ coverage by workplace retirement plans and expand access to lifetime income solutions.
Here are some related provisions to retirement income plan solutions:
- Expanding Portability: Any discontinuance of income solutions, including recordkeeper changes, will now be classified as a distributable event, allowing participants the option to roll over their income assets to an IRA regardless of age.
- Increasing retirement plan options that protect against longevity risk: The SECURE Act expands the existing safe harbor provision, easing liability concerns that have historically proven to be a barrier for plan sponsors from selecting in-plan annuities inside of a 401(k) plan.
- Requiring lifetime income disclosure: The SECURE Act mandates that DC plans provide an annual lifetime income illustration to help participants understand how much a given balance could generate in lifetime income.
How will the SECURE Act help solve for today’s emerging risks?
Participants in DC plans are directly exposed to market downturns (market risk) and the possibility of outliving their retirement savings (longevity risk). And while these risks can be diffused by prudent investment strategies, they can only be eliminated by income guarantees. Even though participants may view such risks differently, access to income guarantees can expand the options for retirement security for all participants.
How does the SECURE Act increase worker access to guaranteed lifetime income?
The SECURE Act creates a new statutory safe harbor that brings certainty and clarity to how a plan sponsor can satisfy their fiduciary duties when selecting an annuity provider. The new safe harbor brings both efficiency and cost savings to the annuity provider selection process.
Does the new expanded safe harbor rule expose plan sponsors or plan participants and beneficiaries to greater risks?
It does not. In fact, the legislative safe harbor actually better protects a plan’s participants and beneficiaries. Any insurer offering annuities in a state must satisfy the state insurance department’s solvency requirements and other rules designed to protect the state’s citizens. The legislative safe harbor only applies to insurers who, for a seven-year period, have not had their license revoked, have filed audited financials, have maintained reserves consistent with state law, and are not operating under an order of supervision, rehabilitation, or liquidation. The expanded safe harbor rule further requires insurers to undergo a financial audit at least every five years.
What other key provisions of the SECURE Act will help to improve retirement outcomes for workers outside of lifetime income?
There are several key provisions within the SECURE Act that are not directly tied to guaranteed lifetime income that will go a long way to improving retirement readiness.
Here are some of those provisions:
- Expanding access to savings plans: Open Multiple/ Pooled Employer Plans (MEPs, PEPs) will now allow unrelated employers to pool together to create a single employer plan for the benefits of scale and reduction in administrative burden. This provision will also allow MEPs to avoid disqualification if a participating employer were to fall out of compliance, something not currently protected under the one-bad-apple rule
- Improving worker savings: Increasing the age for required minimum distributions (RMDs) from 70.5 years to 72 years and increasing the automatic escalation safe harbor cap from 10% to 15% will help modernize the retirement system given increasing longevity and growing reliance on DC savings plans.
Through our hard work both internally and with legislators and regulators, we are proud to stand behind the SECURE Act as a major step in improving the defined contribution retirement system, particularly around supporting lifetime income solutions.
We believe the next generation of retirement income solutions will deliver guaranteed lifetime income as well as non-guaranteed components such as asset allocation, institutional investments, and liability driven investing. Prudential is committed to continuing to lead the way in income and ultimately driving successful retirement outcomes for participants.
For More Information
Contact Josh Cohen, Managing Director, Head of Institutional Defined Contribution at PGIM, to learn more.
1LIMRA Guaranteed Income Investment Options in DC Plans Survey, 2018. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates. PRIAC is a Prudential Financial company.