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Land ho! Navigating the murky waters of guaranteed lifetime income and the annuity safe harbor for 401(k) plans
Due to a collective federal goal of providing Americans with guaranteed sources of lifetime income, namely annuities, as a retirement income strategy, numerous regulations and proposed rules have been issued that allow the use of annuities in defined contribution retirement plans. Despite this goal, annuities are rarely offered to participants in a 401(k) plan. This can be explained, in part, by confusion in properly applying these rules to 401(k) plans. Because of the widespread belief that the "Annuity Safe Harbor" lacks well-defined and measurable standards, many retirement plan fiduciaries simply refuse to expose themselves to the greater risk of liability associated with annuities. This article provides a compass to guide advisers and 401(k) plan fiduciaries safely into the Annuity Safe Harbor, specifically when selecting and monitoring annuity providers and products. First, the background of using annuities for retirement income is explored. Next, the article identifies obstacles to the selection and monitoring of annuity providers and products and provides an overview of recently issued federal regulations and proposed rules expanding the use of annuities in 401(k) plans. In light of impediments to guaranteed lifetime income for 401(k) participants, federal legislative and regulatory actions are proposed. Lastly, guidance is offered from industry experts and recent cases involving the breach of fiduciary duties.