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One of the hardest pieces of retirement planning is turning savings into cash flow. Making sure your nest egg lasts for twenty or even thirty years can be a daunting task. The risk of running out of money is real, even for the best laid plans. But thanks to the SECURE Act, retirement investors are getting a helping hand. Annuities can now be found within 401(k) plans and other retirement vehicles.
And it looks like the roll out has already started.
Several asset managers, plan sponsors and fund providers have begun launching new products for retirement plans designed to be turned into streams of income. For many investors, these products could be a life saver and help them to meet the needs of life-long income in retirement.
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The Setting Every Community Up for Retirement Enhancement, or SECURE Act, was a wide-sweeping bill designed to help Americans overcome the retirement crisis. As such, it covered a variety of retirement issues, including required minimum distributions (RMDs), access to retirement plans and even provisions for college savers via 529 plans.
But, perhaps, the biggest change from the SECURE Act dealt with income solutions within retirement plans. This included the ability to plan for sponsors to add annuities of various kinds as an investment option with 401(k)s, 403(b)s and other similar savings vehicles.
Historically, annuities have been a commission-generating product with a “snake oil” moniker – unscrupulous broker-dealers and agents would sign unwitting investors into products that didn’t necessarily suit their needs. As a result, annuities failed to meet the fiduciary standards to which all retirement plan sponsors must adhere. With the SECURE Act, that major hurdle was removed, adding legal protections to plan sponsors with regards to suitability. Prior to the Act, an employer was legally responsible and subjected to lawsuits if an insurer went out of business and was unable to pay the promised income to annuity owners.
With the passage of the law, annuities could now be placed inside a retirement plan as long as plan sponsors still met their due diligence requirements, including healthy reserve ratios, top financial ratings, a clean bill of health with state regulators, etc.
Since the passage of the SECURE Act at the end of 2019, adoption of annuities has been slow, due in part to the COVID-19 crisis and the generally sluggish pace of changes in retirement plans. But, it looks like things are picking up. A survey from asset manager TIAA reports that nine out of ten plan sponsors who do not currently offer in-plan annuities are at least somewhat interested, and that three out of four plan sponsors are extremely interested in a target-date fund that allocates a portion of its assets to a life-time income option.
And it looks like BlackRock is talking up the call on the second piece of that survey. Partnering with insurers Equitable and Brighthouse Financial, BlackRock (BLK) has announced a new series to popular LifePath target-date funds dubbed ‘LifePath Paycheck.’ Just like BlackRock’s other target-date products, the new annuity-focused funds will feature a mix of assets – cash, bonds, stocks and real estate – that become more conservative as they hit retirement age.
The kicker for the new LifePath Paycheck funds is that once a saver reaches 59 ½, they have the option to purchase a fixed individual retirement annuity with the fund. This easily converts the savings into an annuity that can guarantee a stream of income for life. BlackRock’s hope is that it is able to use its size and clout to offer cheaper prices for the annuity product, eliminate the hassles of going annuity shopping on an investor’s own and make the process seamless.
And they just may have a hit on their hands. Five firms – including the Tennessee Valley Authority and Auto Parts – have already agreed to use the product in their plans and make it the default option. This instantly gave 100,000 workers, with nearly $7.5 billion in savings, access to annuities in their plans.
Not to be outdone, Capital Group, which manages the super-sized American Funds, recently announced that it had partnered with Nationwide Insurance to create a similar product as well as single stand-alone mutual funds designed to be converted into annuities. Analysts expect fund giants like Fidelity and T. Rowe Price to follow suit.
Click here to learn more about how the SECURE Act could impact annuities.
Critics of the SECURE Act have touted the annuity portion of the law in a negative light; however, the reality is that having access could be a real win. Most savers use a 401(k) for the bulk of their holdings. And with pension plans pretty much extinct, the ability to turn savings into income is certainly needed.
While investors need to do their own due diligence and understand what they are buying/investing in, the simplicity of BlackRock’s product is what makes it a top choice. Investors can easily see what their fund can “buy” in income, purchase the annuity and then collect their paycheck. This eliminates much of the hassles of doing it yourself later on or trying to make withdrawals in either up or down markets. Ultimately, the SECURE Act is a win, and we’re now finally getting to see it in action.
Be sure to explore all Target-date Funds.