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More 401(k)s May Get a Makeover With the Addition of Annuities By Rachel Koning Beals
Firms may be more inclined to add guaranteed income to nest eggs if new rules proceed "Not only must [investors] build up a sufficient nest egg during their working years, they must also have a source of steady income at retirement that is well-protected and lasts throughout their lifetime," says In response, a slowly rising number of companies are offering annuities as part of 401(k)s or other retirement plans. More firms may get a government nudge to keep up the trend. There are different types of annuities but in general, they're investments shaped more like insurance; they pay a set or variable income stream in retirement, usually until death. Annuities typically bring the comfort that allows investors to keep a portion of their overall portfolio in more liquid and/or higher yielding assets. But they can be a more expensive portion of any retirement plan and can tie up money that would otherwise be in the market working harder for investors. Critics make sure to label annuities as an insurance product, not an investment. Some observers note that adding annuities is a potential Band-aid fix for a bigger problem: Investors are generally way behind in their retirement savings. Still, many benefits consultants see the inclusion of annuities as an important step in bridging fast-fading pension plans and 401(k)s. Improved longevity is making that equation more difficult, as are risk-management challenges. Market volatility sparked by the 2008 U.S. financial crisis cranked up the pressure on the financial services industry and its regulators to respond with more income options. And a few had started in that direction when workplace consultancy Towers Watson conducted a 2010 survey. It found that about 2 out of 10 employers at that time offered annuities or planned to do so over the coming year or two.
Getting easier? Costs and regulatory concerns limit some corporate participation in offering annuities as part of traditional 401(k) or other defined-contribution retirement plan. Confusion, lack of flexibility, murky fee structures, and existing tax rules have proven prohibitive for some investors. That all might change if proposed There's a push to think of "longevity insurance" as part of retirement planning. The Treasury is proposing the removal of a regulatory block to purchasing a deferred "longevity" annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income starting at an advanced age. This approach can potentially cost less than a conventional annuity and still satisfy spousal beneficiary protection rules. It should also, by design, last longer. The proposal would make it simpler for defined-benefit pension plans to offer combinations of lifetime income and a single-sum cash payment to encourage more retirees to consider partial annuities. Currently, the tax treatment of the split is prohibitive, say most financial planners. Not prepared. Proponents say the need for expanding workplace and financial services participation in "income focused" planning is becoming critical. Recent global economic and market volatility combined with longer lifespans put added emphasis on the need for change. Already, companies have increasingly veered from defined-benefit plans, such as pensions, toward defined-contribution structures, such as 401(k)s. Treasury officials say flexible "lifetime income" options can provide greater certainty in retirement and minimize the risk of retirees outliving or underutilizing their retirement savings. "Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security," said Treasury Secretary
The GAO report showed that most retirees are not waiting. Between 1997 and 2005, roughly 43 percent of Already, some in the financial services industry have moved ahead of the government, realizing that the shift away from pensions and longer average lifespans have opened up a market for golden-year income sources. ING's U.S. Retirement division early this year launched its Lifetime Income Protection Program, which it is selling to companies providing defined-contribution plans to employees. In fact, ING is bringing a hybrid plan to the table--combining target-date and an annuity portion. The plan starts with target-date asset allocation portfolios and converts to a guaranteed income component. ING says it recognizes the need to simplify the process. Plan participants begin the process by providing their date of birth and their savings amount. The rest is handled through the "do-it-for-me" aspects of target-date investing, coupled with a timely and gradual glide-path progression toward purchasing a guaranteed benefit over time. From there, technical elements are taken care of through the program, including risk diversification, long-term asset allocation strategies that employ income-averaging concepts, and income in retirement. Such ease can be good and yet bring new burdens; it's investing on auto-pilot. Are investors really learning more about their own risk management? Proponents just hope more auto-pilot plans include annuities. Sign up for the daily JWR update. It's free. Just click here.
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