The U.S. Department of the Treasury and the Internal Revenue Service recently issued new rules that would allow investors to have access to deferred annuities through target-date funds. That's good news for retirement plan service providers, who are keen to offer new products and services to 401(k) investors.

Regulators took their time in giving guidance to plan sponsors about whether or not the plans can use these products as qualified default investment alternatives. It’s not the first time the idea was introduced. BlackRock, Inc.'s (BLK) LifePath Retirement Income paired target date funds with deferred income annuities from MetLife, Inc. (MET) several years ago. But various regulatory concerns, such as a lack of clarity about whether plan sponsors could actually offer such products, stalled their launch. (For related reading, see: Why You Should Be Wary of Target-Date Funds.)

Today, however, many of those concerns have been assuaged due to the recent guidance from regulators. The new guidance is allowing plan sponsors to actually see how these products can work as qualified default investment alternatives in retirement plans. Great-West Financial and Putnam Investments have also begun reexamining deferred annuities after the Treasury and IRS issued initial guidance in July 2014, making it easier for plan participants to buy deferred income annuities that begin payout as late as age 85.

Phyllis C. Borzi, assistant secretary at the Department of Labor (DOL), also recently wrote a letter to the senior adviser to the Treasury secretary J. Mark Iwry, which stated that looking at target date funds' investment in unallocated deferred annuity contracts as fixed income investments would allow those funds to meet the requirements necessary to make them qualified default investment alternatives in a retirement plan. Also moving things along is the fact that the Treasury memo stated that in order for safe harbor to apply to the plan sponsor, an investment manager and target date fund would have had to be chosen. The investment manager, acting as a fiduciary, would then chose the insurer providing the annuity, and both the investment manager and the insurer would have had to be independent from one other. (For related reading, see: Deciphering Deferred Annuity Designations.)

Separating Investment Manager, Insurer Roles

For its part, insurer Lincoln National Corp. (LNC) is already trying to address the issue of keeping the role of investment managers separate from its role as insurer. That’s because the insurer offers guaranteed withdrawal benefits in connection with target date funds, which are not addressed in the Treasury's latest memo. Third-party financial advisers and consultants, who act as fiduciary investment managers, can come up with their own fund line-up from somewhere else or work with a fiduciary and use the guaranteed features offered by Lincoln. (For more, see: Guaranteed Minimum Withdrawal Benefit and Guaranteed Lifetime Withdrawal Benefit.)

Still, while guidance from the Treasury, the IRS and the DOL are making it easier for plans to incorporate annuities as a part of their plan lineup, industry experts say that there remains room for more clarification. For example, because investment managers are responsible for selecting the insurer, some pressure is taken off the employers. This allays a longstanding concern that plan sponsors have had about their liability for choosing a provider if they are unable to meet the payments later on. (For related reading, see: What You Need to Know About the Fiduciary Standard.)

More Guidance Needed

That said, other unanswered questions still linger. The DOL's guidance outlining safe harbor as it applies to annuity selection still seems subjective. That’s because the entity that chooses the provider must also appropriately consider the cost of the contract and make sure that the information is sufficient enough to assess whether the provider can make the payments. This can make it difficult to figure out whether or not the organization is complying with the safe harbor and if it is protected by it. There is also some concern about what the pricing will be. It could be different depending on age groups, for example. Also, some employees may want to distribute their savings earlier than expected so there may be a price adjustment for that.

Paying Premiums

Another area that is still causing concern in the industry is that the most recent guidance from the Treasury only applies to deferred income annuities in which buyers pay premiums in the present in order to receive income over a course of years in the future. Excluded from the guidance are guaranteed minimum withdrawal benefits and guaranteed lifetime withdrawal benefits. Guidance on those products should be forthcoming from Treasury, most assume. The guaranteed withdrawal benefits act as an insurance wrapper around the underlying investment and that the Treasury’s note addressed annuities only within target date funds, which present different issues.

The Bottom Line

Recent regulatory guidance from the Treasury and other government bodies may soon allow for access to deferred annuities through target date funds, opening up a whole new product line for employees to choose from in their 401(k) accounts. (For related reading, see: An Overview of Annuities.)