Annuity Secure Act Impacts Not Being Disclosed at Point of Sale
Originally, I intended to author this blog one year following the passage of the Secure Act but, out of fairness, decided to give the life insurance industry a little more time. Now, a full TWO years later, I think sufficient time has passed to assign the life insurance industry an “official” F grade. I’m not going to single out individual carriers because, I don’t think it’s fair to criticize without giving a chance of rebuttal. Besides, they all know who they are!
I posted the following blog on 01.03.2020 regarding the impact of the Secure Act (12/31/2019) on QUALIFIED single premium immediate annuities (SPIAs)/deferred income annuities (DIAs) and Defined Benefit Pensions (DBs) plans on LinkedIn “How The Secure Act WRECKED the SPIA/DIA Pension Business” .
In the 2020 blog, I incorrectly estimated the life insurance industry and DB pension plan Trustees would refrain from issuing certain qualified SPIAs/DIAs and DB Pension choices for the purpose of controlling “payment elections” that; when the Owner dies, may produce post issue Secure Act conflicts.
Now two years later, for the most part, the life insurance industry continues to issue new SPIAs/DIA contracts primarily as Individual Retirement Arrangements (IRAs) and DB pension plans continue to conduct business as usual. Between SPIAs/DIAs and DB pension plans, there are literally hundreds of payment variabilities. While there is only one contract, a life insurance company files a Statement of Variability (SOV) with the issue States in order to obtain approval for the annuity payment options it wishes to offer. A DB pension plan Trustee publishes a slate of payment variabilities the plan offers to retirees.
To briefly recap (but see my original LinkedIn blog 01.03.2020). Post Secure Act, the qualified SPIA/DIA and pension market was immediately bifurcated into the following contract classes.
The first class of contracts is: Annuity contracts and pension payments that WILL perform for Owners and their Beneficiaries.
The second class of contracts is: Annuity contracts and pension payments that WILL perform for Owners but “MAY NOT” perform for Beneficiaries.
Regarding SPIAs/DIAs/pensions in the second class, an Agent no longer can show consumer pre-sale illustrations for SPIA/DIA contract pricing without disclosure of the Beneficiary possible non-performance problem (see below, 2nd class). If the Agent is a FIDUCIARY, they need to disclose this performance weakness “prior to sale” of contracts in the second class.
However, most Agents (non-fiduciary) continue to show qualified SPIA/DIA illustrations for possible non-compliant Secure Act contracts remaining blissfully unaware of Secure Act related problems. In fact, after checking with a few SPIA/DIA pricing platforms, all carriers are illustrating SPIA/DIA contract pricing WITHOUT reference to Secure Act issues. This isn’t the platforms fault; platforms merely regurgitate what the carriers tell them without passing judgment on the data or notes the carriers provide.
Secure Act Class Recap (Not considering other Secure Act exclusions)
1st Class (Non-Problem Class): SPIAs/DIAs and DB pension plans with period certain payments not exceeding 10 years or payments that may exceed 10 years and the contract has a Beneficiary period certain payment commutation feature, cash refund, and Joint (JT) and survivor contracts where the Annuitants are within ten years of age. (Note: no SPIA/DIA contract or DB pension plan I’m aware of features a JT Annuitant payment commutation feature) This is the sum total of non-problematic contracts.
2nd Class (Problem Class): SPIAs/DIAs and DB pension plans with period certain payments exceeding 10 years, installment refund with no Beneficiary payment commutation feature and JT and survivor contracts where the Annuitants age difference exceeds 10 years. (Note: some people will point out spousal associated contracts, regardless of age, should be in the first class. But this is only reflective on the “purchase date”. Lifetime income or payment eligibility is determined at “time of Owner death” and not as of the contract issue date. Once the contact is in-force should both spouses survive but divorce, the 10+ year much younger JT Annuitant spouse is no longer eligible for JT lifetime income or in the case of period certain, payments exceeding ten years).
To get round the carrier non-disclosure problem, many “knowledgeable” SPIA/DIA Agents and even some IMOs have unilaterally elected to “only show” those SPIAs and DIAs contracts that will NOT incur a Beneficiary Act problem (i.e. those contracts from the first class). For example; it’s been reported to me CANNEX is experiencing a significant increase in “cash refund” illustrations requests. Cash Refund is a SPIA/DIA contract variability election (in the first class) that will NOT experience a Secure Act problem. Because average people hold a preponderance of their wealth in qualified plans and IRAs, I’m assuming most of this CANNEX quote activity reflected qualified contracts vs non-qualified contracts. But the tax qualification of the illustration activity was not reported.
Instead of making the “full range” (both classes) of SPIA/DIA payment “variability” to consumers and explaining the issue then, letting them make a choice, certain annuity agents are unilaterally imposing a restricted consumer choice. A consumer might actually prefer a possible non-compliant Secure Act contact because of say; higher annual payments vs premium costs, even if it means their Beneficiaries may not be treated as illustrated. But fearful knowledgeable agents are not showing contracts in the second class primarily due to Home Office silence on the matter.
For example: a 15 year period certain and life contract will offer higher payments than a cash refund contract for any age and gender consumer. But, a prospective Owner isn’t getting a chance to see this variability because there is chance the Owner could die and leave MORE than 10 years certain to a non-eligible beneficiary such as an adult child. Without a pre-purchase disposition disclosure, no FIDUCIARY Agent wants to be on the hook to the Beneficiary when, they don’t end up getting the SPIA/DIA performance illustrated to the Owner at point of sale.
The life insurance industry and DB pension industry, as a whole, gets an official F for not providing Owners with pre-purchase Beneficiary disposition disclosures regarding how they intend to adjust in-force non-compliant Secure Act contracts and DB pensions. Over the last two years and after many, many carrier conversations, I arrived at an “official” life insurance company consensus:
‘We will fix non-compliant Secure Act contracts as we see fit, when we see fit, on an individual basis at the terms we think fair.’ ‘The contract Owner is dead and no one cares about the Beneficiary enough to extend reasonable courtesies or guarantees in advance of the Owner’s contract purchase’.
I mean wow, who cares about the Beneficiary? When the Owner dies, the Beneficiary goes down with the ship! Hum, where have I heard that before? I know, The Birdcage Nathan Lane’s now famous ‘kill the mothers’ sceen. (see https://www.youtube.com/watch?v=T9cTQ1ZRdbw at 1.25 – 1.45 mins)
This isn’t just a “new business” problem; there exists the entire “in-force” block of qualified “cash value” deferred (defined contribution) and SPIA/DIA annuities (defined benefit) as well. Owner’s electing new Settlement Options and new beneficiaries on their existing contracts need to be aware of Secure Act implications re their post issue elections. For example, several years following the issue date; if your primary Beneficiary at issue was a spouse within 10 years of age and he/she predeceases you, you might decide to name an adult child as a the primary Beneficiary and-so forth and so-on. The Home Office should inform Owners of potential Secure Act conflicts and how “specifically” they intend to deal with them when/if they occur before Owners make Beneficiary elections on the different kinds of in-force annuity contracts.
A mixed carrier response (Nothing to be proud of)
Now two years later, several home offices I spoke to “verbally” claimed (at least, at this point of time) they are going to wait the 10 years following Owner/Annuitant death (make all the 120 payments, if no commutation offered) and only following that time address any Act offending payments in “some fashion”. They refuse to put this in writing and to state what interest rate they would offer the Beneficiary to be used when commute the offending period certain payments. No word on how they would commute Secure Act offending “mortality pooled” payments due to ineligible JT Annuitants for lifetime payments. No word regarding any direct dollar costs they would impose on Beneficiaries to do so.
Several carriers “verbally” stated (at least, at this point of time) upon Owner/Annuitant death they would immediately offer an “actuarially equivalent” 10 year Beneficiary payment. But would not state at what interest rate they would use to do so or how this would be accomplished for “mortality pooled” Annuitants. No word regarding any direct dollar costs they would impose on Beneficiaries to do so.
Other carriers took the easy out and decided to restrict new issue. For example; there are some carriers that will no longer issue JT Survivor annuity contracts when the Annuitant age difference exceeds ten years, regardless if the Annuitants are spouses. They just don’t want to deal with the divorce problem at a time when contract payment re-pricing may be against them and all the cost associated with having to make contract payment changes to previously issued mortality pooled payments.
A few carriers no longer issue period certain payment durations exceeding 10 years and of those carriers not already featuring a period certain commutation feature, no one appears to be rushing out and changing their contracts. They just don’t want to spend the money to re-file and build administration systems to support annuity payment commutations.
Regarding SPIAs/DIAs, a few carriers provide the following statement or similar: “All income Options are subject to IRS regulations and Federal Laws governing income payments under defined benefit pension plans”. While absolutely true under IRS regulations, defined benefit pension plan retirement distribution rules (RMDs) also dictate IRA SPIA/DIA RMD rules, it’s a “lawyers dodge”. What? Consumers and regular agents are supposed to know the “defined benefit pension plan” RMD rules prior to purchasing an IRA. It’s an astonishing and ridiculously useless statement.
Normally, not possible for non-qualified contracts, how does the carrier hold the power to make unilateral post issue payment changes to their in-force SPIA/DIA qualified contracts? They hold this power via the “IRA” or other “qualified plan” contract “endorsement” issued with the contract. At the heart of all such contract endorsements is supporting language that permits carriers to “adjust” contract payments to comply with future IRS changes such as the Secure Act. But these endorsements don’t grant Owner/Beneficiary rights, don’t state minimum terms, and don’t state when, following IRS pronouncement, such changes will occur; don’t list fees for contract changes, etc. IRA contract endorsement language always rules when Owner/Beneficiary contract language/rights conflict.
SPIAs/DIAs and DB pension plans hold a very special place in the pantheon of financial products and certainly all other annuity contracts. Academics and pension experts favor the SPIA/DIA design for annuity lifetime payment reliance vs other deferred cash value annuities because; SPIAs are like pensions, defined benefit and permanent designs. Other annuity contracts (“cash value” deferred) and other financial products (401(k)s, brokerage accounts, bank accounts, etc.) are “defined contribution” and for all intents and purposes, are merely savings accounts. That’s why SPIA/DIA RMD and DB pension plan rules are different!
Approaching old age with a weak reliance on defined benefit lifetime income historically is a recipe for poor financial outcomes. This importance of the SPIA/DB benefit role was nicely summed in the recent film “The Baby Boomer Dilemma” by Doug Orchard films. Everyone should see this film, it’s modern and built for the times in which we live and a great SPIA/pension story.
Unlike deferred annuity markets, there is no centralized SPIA/DIA national data resource, other than what can only be characterized as “click bait” material used for media outlets, regarding carrier SPIA/DIA activity. SPIA/DIA market activity is shrouded in fractured bits and pieces. Annuity insurance companies don’t want to be bothered and no one presses them.
The Secure Act introduced a weakness in the SPIA/DIA DB pension plan structure that remains unaddressed today, a full two years later. Since the carriers have not been forthcoming, I have spoken to many SPIA/DIA agents regarding safe guards they can take to continue to offer SPIAs/DIAs from the second class of contracts.
However, sometime in 2022, you now have new institutional players looking at the qualified SPIA market. The 800 Lb gorilla, Fidelity, (recognizing the value of the defined benefit design for lifetime income also reflected in the Doug Orchard film) recently announced a new SPIA purchase platform for use in its qualified plan business.
It remains to be seen if Fidelity will permit platform carriers to only issue from the first class of contracts or will they permit carriers to also issue from the second class of contacts but make them offer pre-purchase Owner/Beneficiary disclosures of how and when Secure Act non-compliant contracts will be returned to a compliant status. Or, perhaps, will Fidelity not care and let their carriers continue with business as usual. But, if Fidelity begins to make demands of their platform carriers, will non-platform SPIA/DIA carriers feel compelled to follow suit? We will see what 2022 brings.
So, while the new issue SPIA/DIA markets have shrunk to all-time lows, the life insurance industry for the most part, continues to ignore possible Secure ACT problems to concentrate on their more lucrative deferred annuity (defined contribution) savings account lines.
The bottom line is; if you are a consumer out there be careful from whom you purchase qualified SPIAs/DIAs or taking Advisor advice regarding DB pension plan elections. You might not be getting the full story or at worse, might not be seeing the appropriate choices for your case.
In fact, you just might want to seek out an immediate annuity/pension expert. Gee, I wonder where you can find one of those?!