Compliance January 30, 2023

What Can Annuities Gain From Secure 2.0 Act?

The law offers some minor changes, but some sections do result in increased availability and flexibility for annuities.

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The SECURE 2.0 Act of 2022, the retirement reform legislation that passed in December 2022, aimed to increase retirement access and security for Americans, primarily by reforming defined contribution plans.

SECURE 2.0 has been criticized for containing few reforms related to annuities, despite research showing both their popularity among workers and that Americans lack knowledge about their own life expectancy. Though the reforms made to policies addressing annuities in SECURE 2.0 are few in comparison to the changes made to defined contribution retirement plans, or even defined benefit plans, the legislation still has some impact on annuities.

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Section 201 of SECURE 2.0 removes availability barriers to some life annuities in tax-advantaged retirement accounts. Previously, required minimum distribution tests limited the availability of some lifetime annuities which had large benefit increases from year to year. SECURE 2.0 allows these annuities to increase at a constant percentage, no more than 5% per year.

Section 202 seeks to make Qualified Longevity Annuity Contracts easier to invest in. The section raises to $200,000 the cap on how much money a participant can use from their retirement account to purchase a QLAC. It used to be either 25% of the account’s value or $125,000, whichever was greater. The new figure of $200,000 is also indexed to inflation, whereas the previous $125,000 maximum was not.

Additionally, according to Elizabeth Dold, a tax attorney and executive committee member at the Groom Law Group, Section 204 allows a retiree with a partially annuitized plan to combine the payments from both the annuity and the plan for the purposes of calculating their required minimum distribution. Previously, the two accounts had to be separated, each with their own RMD calculation, which could result in higher RMD payments than if they were counted together.

This allows the assets in the plan to potentially continue to grow, giving the retiree more flexibility in their retirement planning going forward.

Compliance January 27, 2023

New DOL Rule on ESG Investing in Retirement Plans Draws Republican-Led Legal Challenge

The rule is scheduled to take effect on Monday, but 25 state attorneys general and three fossil fuel advocates are seeking an injunction to block it.

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Twenty-five states with Republican attorneys general, two oil-services companies and an oil and natural gas advocacy group filed a lawsuit in U.S. District Court on Thursday against the Department of Labor seeking to prevent and overturn its rule permitting environmental, social and governance considerations in retirement investing.

The lawsuit, filed in the U.S. District Court for the Northern District of Texas, also was brought by oil-service companies Liberty Energy and Liberty Oilfield Services, advocacy group Western Energy Alliance and retirement plan participant James R. Copeland. It seeks to prevent the implementation of the DOL’s final rule regarding the use of ESG strategy in retirement investing, set to take effect on Monday, January 30.

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The lawsuit claims the rule oversteps the Department of Labor’s statutory authority under the Employment Retirement Income Security Act of 1974 and seeks a preliminary injunction against it. The plaintiffs are also asking the court to grant “permanent relief in the form of a declaration that the ESG Rule violates the [federal Administrative Procedures Act] and ERISA and is arbitrary and capricious.”

The rule clarifies that fiduciaries may consider ESG factors in investing without violating their fiduciary duties but does not require it.  The rule as adopted clarifies how the fiduciary duties of prudence and loyalty under ERISA apply to selecting investments and investment courses of action, including selecting qualified default investment alternatives; exercising shareholder rights such as proxy voting; and the use of written proxy voting policies and guidelines.

The rule reverses amendments to the department’s investment duties regulation adopted in 2020, during the administration of President Donald Trump.

The lawsuit claims that the rule “undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets.”

The state attorneys general bringing the suit represent Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, Ohio, South Carolina, North Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

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