Torrid Tech Explains Why New Gov’t Policy is a Green Light for Advisors to Increase Annuity Options in Retirement Plans
Torrid Technologies, a retirement planning software company, breaks down the government financial technobabble and explains to advisors how new U.S. Department of the Treasury and Internal Revenue Service policy changes allow them to increase their client’s annuities and why consumers should consider this option.
Designed to expand the use of income annuities in 401(k) plans, the change makes clear that plan sponsors can include deferred income annuities in target date funds used as a default investment
Torrid Tech’s Explanation: Employees saving in their 401(k) plan at work can choose annuities from insurance companies inside their 401(k) plan so they can reduce market losses on their retirement savings by putting their savings into annuities, instead of mutual funds or target date funds.
Many employer-sponsored 401(k) plans offer so-called target date funds as a default investment for participants who do not affirmatively elect a different investment. Target date funds get their name from the fact that their allocation of investments shifts gradually from equities to fixed income as participants approach an intended target retirement year.
Torrid Tech’s Explanation: In recent years target date funds have exploded in popularity by offering workers a way to reduce risk in the market as they approach retirement. Recent abnormal bond pricing has made it difficult to achieve this result and has left many wondering whether target date funds are accomplishing their goal.
The new guidance or policy provides plan sponsors an additional option to make it easier for employees to consider using lifetime income. Instead of having to devote all of their account balance to annuities, employees use a portion of their savings to purchase guaranteed income for life while retaining other savings in other investments.
Torrid Tech’s Explanation: This means the employee can choose to put some into annuities for lifetime income and still also have savings in other investments like mutual funds.
Under the guidance released a few weeks ago, a target date fund may include annuities allowing payments, beginning either immediately after retirement or at a later time, as part of its fixed income investments, even if the funds containing the annuities are limited to employees over a specified age. The guidance makes clear that plans have the option to offer target date funds that include such annuity contracts either as a default or as a regular investment alternative.
Torrid Tech’s Explanation: This means that the employer plans have the flexibility to offer the annuity as an option or as a default when employees save into their 401(k) plan.
In an accompanying letter, the Department of Labor also confirmed that target date funds serving as default investment alternatives may include annuities among their fixed income investments. The letter also describes how ERISA fiduciary standards can be satisfied when a plan sponsor appoints an investment manager that selects the annuity contracts and annuity provider to pay the lifetime income.
Torrid Tech’s Explanation: This repeats the idea the annuities can be included as part of the fixed income portion of target date funds and that a plan can meet its fiduciary standards by having an investment manager selecting which annuity options are offered.
In July, the Treasury Department and IRS issued final rules on the use of longevity annuities – a type of deferred income annuity that begins at an advanced age – in 401(k) plans and IRAs as part of a broader coordinated effort with the Department of Labor to encourage lifetime income and enhance retirement security.
What does this mean for you? The new policy change is another step reflecting the continuing commitment of the Administration to work in a variety of ways to further bolster retirement security and saving.
Here are a few action steps to take advantage of the green-light:
-employers need to immediately look into changing their 401(k) plans to offer these new annuity options
-their plan advisor needs to determine which annuities to offer and add them to their options
-employees need to be educated about these new options, their value, and why they should take advantage of these new annuity options
-everyone involved needs to monitor the plan to see if these new rules are working in practice, instead of in theory
About Torrid Technologies
Torrid Technologies offers a keep it simple retirement planning tool that allows you to hold onto a strong retirement future, even if the powers that be in Washington try to make a grab for it. You can download a complimentary demo copy from their website at: http://www.torrid-tech.com
1860 Sandy Plains Rd.
Marietta, GA 30066