By: Eric Truntz, Senior Principal
The SECURE Act—which stands for “Setting Every Community Up for Retirement Enhancement”—officially went into effect on January 1, 2020. The Act changes retirement savings rules for employees and retirees and aims to strengthen retirement security influenced by changing demographics.
Why was the SECURE Act created?
According to the National Institute of Retirement Security, the median retirement account balance for working Americans between the ages of 55 and 64, is only $15,000; 66% of working millennials ages 21 to 32 have nothing saved for retirement. In a nutshell, many American workers aren’t saving enough for retirement.
The SECURE Act provides significant changes to retirement planning options intended to improve retirement readiness for millions of Americans. To do so, it will increase access to workplace plans, improve retirement savings potential, and make it easier for employees to convert savings to guaranteed retirement income.
What does this mean for the insurance industry?
The bill makes it easier for annuities to be included in 401(k)s, ultimately offering Americans more options for retirement income. To provide this, the bill will remove or decrease some of the fiduciary requirements for insurance companies and products included in the plan. In doing so, insurance companies will have fewer hoops to jump through to be considered into a sponsors’ portfolio. Ultimately, this means insurance companies could see a jump in business as they gain more sponsors.
Additionally, businesses have been historically cautious in adding annuities to their 401(k)s since they could be held liable if the annuity provider can’t make payments as promised. Under this new law, employers are granted a “fiduciary safe harbor” when choosing an annuity provider, meaning they will be safeguarded from future liability provided they follow specific guidelines.
Safe Harbor will drive innovation
This particular portion of the Act is attractive to insurers from both a sponsorship standpoint and as a catalyst to drive innovation. “I do think the safe harbor will create more interest from plan sponsors and drive uptake of existing options and some innovation,” said Sri Reddy, senior vice president in the retirement and income solutions unit of Principal Financial Group.
Insurers will need to be assessed every five years by its state insurance commission, as well as notify plan sponsors of any changes in representation. Many businesses will look to this assessment, plus several other factors—like does it have all the required services, is it licensed to offer guaranteed income products, etc.—to determine if the carrier will be able to carry out the contract.
Stretch IRAs get a makeover
The SECURE Act removed the stretch IRA plan for most non-spouse beneficiaries. It instead replaced it with a 10-year rule, so those using an IRA for inheritance purposes need to strategize another plan. A withdrawal of an inherited IRA is taxed at the beneficiary’s income tax rate, which could mean they pay more on their new assets versus receiving the inheritance in a different form.
Other alternatives to explore include life insurance, a new potential uptick in business from the SECURE Act. To do this, IRA owners could withdraw from their accounts to buy life insurance policies to benefit their inheritors. In doing so, the beneficiary receives a tax-free benefit that could build up value over time. However, time is of the essence. Anyone considering this should withdraw starting at age 59.5, the age in which you can withdraw from an IRA without penalty. Then, speak to a life insurer to get a health-based quote and, eventually, a policy.
What’s next for insurers?
As insurers plan to participate in this market, ensuring their solvency, offering innovative products at a reasonable cost, and streamlining the process for plan sponsors will ultimately make them most successful in winning new business. They should also consider ramping up life insurance efforts, both marketing to those impacted by the loss of a stretch IRA and in ensuring a quick health insurance application process.
If your business needs to set a strategy for the SECURE Act, contact a NEOS expert today. With two decades helping insurers with their business strategy needs—including combatting the effects of new laws—we are well-equipped to set you on the right path.