June 5, 2019
Re: SECURE’s real purpose is not aimed at retirement but at annuity sales
To: Mr. Joel Christopher, Editor, Knox News/USA Today
Dear Mr. Christopher,
I am writing in response to David Moon’s opinion piece regarding the SECURE Act published in the Knox News on May 30, 2019. Mr. Moon’s initial interpretation of the positives of the SECURE Act are certainly understandable, as the legislation is targeted to help American’s save for retirement. However, he misrepresents or misunderstands the provisions providing for lifetime income that are proposed in the legislation.
It should be noted that the bill does not require any employer to offer annuities. Significantly though, employers are required to annually provide a lifetime income illustration to help 401(k) plan participants understand what their current account balance, saving patterns and investments might provide as a monthly income stream during retirement. Accordingly, the legislation would help consumers understand the risks of saving too little during their accumulation phase in an effort to secure a stable retirement income for their lifetime.
There is ample precedent for trying to accomplish this goal, as past generations of retirees had defined benefit pension plans that provided a salary-like payout in the form of an annuity payment for life. These plans covered almost 50 percent of retirees through the 1980s, but, because of costs, demographics and other economic factors, only a little more than 20 percent of workers today have access to this type of retirement benefit. The majority of current employer retirement plans are 401(k) plans in which the participant is funding the majority of the account, while (in some cases) an employer match is added to the amount contributed. These plans are subject to the returns of the underlying investments, and there is no guarantee of a lifetime payout or how the account will fare during turbulent economic times.
In addition to requiring lifetime income illustrations, the SECURE Act includes a so-called “annuity safe harbor,” which provides flexibility for an employer or plan sponsor to offer lifetime income products as an option for plan participants. And, yes, annuities are the only product that provide lifetime income. That is what they are designed to accomplish. An annuity provides a lifetime income payment based on certain variables, including the initial principal payment, the amount of interest credited to the contract, and the age and life expectancy of the annuitant.
Annuities are one of the few products that eliminate longevity risk; simply put, they are insurance contracts that hedge against living a long life and running out of income. Most 401(k) participants will live 25 to 35 years in retirement and will be subject to market fluctuations, inflation and rising healthcare costs. Having a stable retirement income may help mitigate these risks.
The other major factor in allowing these options and illustrations is they are subject to the fiduciary obligations of the Employee Retirement Income Security Act of 1974 (“ERISA”) that regulates how plan sponsors, trustees, plan administrators, investment advisors, financial advisors and other insurance professionals must act in order to work with 401(k) plans. Fees are monitored and investment and payout options must meet a prudent person standard that provides for significant due diligence on the part of the employer and a high standard of care by any entity that provides services or products to an ERISA plan.
The SECURE Act has tremendous bipartisan support, passing by a recent House vote of 417-3, and is a great step toward trying to help shore up many of the issues that Americans currently face regarding saving for retirement. Ultimately, this legislation stands to help retirees enjoy stable income as they face the challenges of living into their golden years.
Charles J. DiVencenzo
President & CEO