Measure's provisions are a big win for annuity providers and
those who see the need for more lifetime income options in retirement plans.
Dec 17, 2019 @ 4:35 pm By Bloomberg
The SECURE Act, which was approved by the House
Tuesday, would impact annuities in a number of ways, but I
want to focus on two, starting with a provision that changes how annuities
would be treated, which can be found in Sec. 204 of the act.
The provision’s goal is to help relieve
fiduciaries’ responsibilities in selecting and reviewing annuity providers and
annuities to ease the burdens of getting annuities into 401(k) plans. Seen as a
huge gift to the annuity world, this is a big win for annuity providers and
those who believe retirees need more lifetime income options in
their retirement plans.
Fiduciaries wouldn’t be required to select the
lowest-cost product for their plans. The provision would allow them to meet
their fiduciary requirements if they choose an annuity provider who’s in good
standing with state regulators. They’re no longer pressured to do a full due
diligence review on the products and provider, although I still suggest
fiduciaries do so.
The other annuity provision I want to discuss
circles back to stretch distributions. The
act’s stretch provision would eliminate most beneficiaries’ ability to stretch
distributions from IRAs and defined-contribution plans over their life
expectancy — excluding spouses, who can still take advantage of stretch
strategies.
If stretch distributions were removed, any
annuity contract held within a defined-contribution plan or individual
retirement account would fall into the 10-year distribution period for
non-spouse beneficiaries. This would be a big problem for IRAs and 401(k)s
holding certain types of annuity contracts.
However, a provision in Title IV, Section
401(a)(4) of the act provides an exception for certain existing annuity
contracts. The bill states that certain qualified annuity contracts meet the
exception. To meet the exception, they must be commercial annuities that make
payments over the life of the employee or life of the employee and a designated
beneficiary’s life.
In addition, the annuity would need to make payments
before the enactment of the SECURE Act (Jan. 1, 2020) or an irrevocable
election before that date.
Grandfathered annuities under the SECURE Act
would pay for the lifetime of two people. An example is a single premium
immediate annuity or annuity in payout that would continue payouts to children
or grandchildren over their lives. As long as the annuities meet the
grandfathering rules, there should be no issue.
However, new annuities or annuities without a
definitive payout decision wouldn’t fall under the grandfathering rules.
According to annuities expert Gary Mettler, annuity
contracts’ ability to pay out over two non-spousal lives will only remain
possible if the non-spousal individual qualifies as an eligible designated
beneficiary.
Under the SECURE Act, an eligible designated
beneficiary is an individual who is either disabled or chronically ill (as
defined by the IRS) or any individual who is no more than 10 years younger than
the IRA owner.
If the non-spousal annuitant is within the
10-year age range, the annuities could still be placed for siblings and
significant others. Annuities paying out to the surviving spouse will be OK.
Some dollar limit might also be exempted if
the SECURE Act were revised or the Senate version of the Retirement Enhancement
and Savings Act were passed. This is what Mr. Mettler hopes for. While he sees
some opportunities for better planning under the SECURE Act, he also sees
significant challenges for certain annuities, especially single premium indexed
annuities, under the current legislation.
New annuities sold with joint non-spouse
beneficiaries moving forward in IRAs might not be able to adhere to the 10-year
distribution rules. These annuities would need some cash-out or modification
feature moving forward. This could be a real issue for some annuities currently
inside of IRAs without this option or annuities that are sold after the SECURE
Act.
The SECURE Act might not secure retirement for
everyone, but it does offer some commonsense changes. The gut reaction to the
bill is that the huge impacts on the stretch IRA distributions and annuities
are for the better.
Still, the bill is not the completely positive
outcome for annuities that some might expect. Its passage in the Senate isn’t
guaranteed either.
Despite its moderate strength and uncertain
future, it’s important to know retirement planning will change. Understanding
how now will help your clients and their beneficiaries in the long run.
Jamie Hopkins is
director of retirement research and vice president of private client services
at Carson Group.
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