SECURE Act Attempts to Advance Annuities in Company Savings Plans – Part 2: Portability and Benefit Statement Illustrations
By Ian Berger, JD
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The new SECURE Act contains three provisions that are designed to promote annuities in company savings plans. The January 8, 2020 Slott Report described the first of these three changes – new protection for companies if the insurance company selected by the plan to provide annuities later runs into financial difficulties and cannot make payments. Today, we will discuss the other two new provisions.
Congress believed that plan sponsors were reluctant to offer annuity products in savings plans not only because of potential liability, but also because of uncertainty over whether the company could later eliminate that option. The second change addresses what happens if a plan begins to offer annuities as an investment option but for whatever reason decides to drop that option. In the past, participants who had invested in annuities would be stuck with termination penalties, surrender charges or other fees when the annuity was liquidated. To make matters worse, they would be unable to receive a distribution of the annuity contract because of restrictions on in-service withdrawals.
The new law provides two ways for participants to keep their annuity investments if the annuity option is dropped from the plan: (1) making a direct trustee-to-trustee transfer to an IRA or another company plan that accepts transfers; or (2) receiving an in-kind distribution of the annuity contract. Both must occur within 90 days before the annuity option is eliminated.
This change applies to 401(k), 403(b) and 457(b) plans. Withdrawals for this reason would be considered permissible in-service withdrawals.
The new provision is effective for plan years beginning after December 31, 2019 (January 1, 2020 for most plans).
The third change requires companies to begin including annuity illustrations in the benefit statements they are required to provide to participants. Although these statements must be given out quarterly, the new illustrations are only required annually. The illustrations must show the amount of monthly payments a participant would receive if the participant’s account balance was used to buy an annuity. The assumption is that plan participants, after seeing these illustrations, will lobby their employer to begin offering annuities.
These annuity illustrations are not required until after the Department of Labor gives guidance on the new rule.
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