eyeglasses resting on dictionary with fiduciary duty defined (Photo: Shutterstock)

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Passage of the SECURE Act brought long-awaited regulatoryrelief for champions of guaranteed income products in definedcontribution plans.

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A provision of the bill—the Fiduciary Safe Harbor for Selectionof Lifetime Income Provider—amends an existing safe harbor plansponsors could tap if they wanted to add an annuity to an investment menu.

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In order to satisfy the old safe harbor, plan fiduciaries were requiredto "appropriately" conclude at the time of selecting an annuitythat the insurance company "is financially able to make all futurepayments under the annuity contract," according to a 2012 fieldassistance bulletin issued by the Labor Department.

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That requirement—forecasting the long-term solvency of aninsurance company—was regarded as onerous by many plan sponsors,according to industry surveys, and explains, in part, the slackadoption of annuities in 401(k) plans. According to the PlanSponsor Council of America, less than 10 percent of employers offeran annuity in their 401(k) plan.

Using state insurance commissioners

With the new safe harbor passed in the SECURE Act, employerswill be able to rely on state insurance commissioners, whichestablish liquidity requirements for insurance companies designedto facilitate long-term solvency.

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Fiduciaries can satisfy a requirement to periodically review aselected insurance company by receiving annual representations fromthe insurer that they are in compliance with state regulations.

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If an employer satisfies the new safe harbor, they cannot beheld liable after a participant begins receiving payments fromannuities. Nor will employers be liable for investment losseswithin annuity contracts.

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And perhaps most importantly, an employer cannot be held liablefor an insurance company's inability to meet its long-termobligations under annuity contracts.

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Bob Melia, executive director of the Institutional RetirementIncome Council, whose members include insurance companies and assetmanagers, told BenefitsPRO in earlier coverage that the new safeharbor will not necessarily make annuities omnipresent in 401(k)s,and that opinions differ on how much it will spark annuityadoption.

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"Employers will only adopt—and should only adopt—retirementincome solutions if it makes their plan a better human resourcetool. Unless, or until plan sponsors are thinking like that, Idon't think you will see widespread adoption," said Melia.

Is the safe harbor open to abuse?

While the SECURE Act has vast bipartisan support, critics ofannuities have said the safe harbor will expose retirement saversto unnecessarily expensive and opaque investment products. ChrisJones, chief investment officer for Edelman Financial Engines, hasconcerns over language in the safe harbor, and said some arepositioning it as a "green light" to offer annuities in retirementplans.

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"The notion that plan sponsors might see this a as a blank checkto put these types of products in plans is problematic," saidJones. "Some are positioning this as a 'safe harbor' for annuitiesin retirement plans. I don't think it's as big of an issue forlarge plan sponsors, but I do worry about smaller employers thatdon't have inside ERISA counsel. My concern is sponsors will bemisled."

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Jones is leery of annuities being part of a qualified defaultoption.

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Unlike target-date funds, annuities often come with surrendercharges. And participants may be exposed to "lapsation," where theyend up pre-paying for longevity insurance they may not use if thechoose not to annuitize at retirement.

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"That's a big source of revenue for insurance companies," addedJones. "Annuities can be an important building block forretirement. But there is a lot of abuse in selling these products.Our concern is the safe harbor will provide an opportunity forinappropriate products to make their way into 401(k) plans."

No safe harbor for picking an annuity

Jim Szostek, vice president of taxes and retirement security atthe American Council of Life Insurers, says Jones' concerns areunfounded, and that using regulators to determine an insurancecompany's future viability is the right policy approach.

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"This is an annuity provider selection safe harbor," saidSzostek, with emphasis on provider. "It is not a safe harbor forpicking an annuity."

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Szostek notes that language in the provision states thatselecting an annuity is still subject to a fiduciary standard. Thecost of an annuity, including fees and commissions, will still haveto be reasonable under ERISA's standard, according to the safeharbor.

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While fiduciaries are not obligated to select the cheapestproducts, they will be required to undertake a cost benefitanalysis when putting annuities in 401(k) plans. What fiduciarysponsors will not be required to do is independently assess thelong-term solvency of an insurance company.

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"This is about helping to pick a provider," said Szostek. "Wethink relying on state insurance regulators is the rightapproach."

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.