Treasury's lifetime-income proposals lean heavy on education

Observers find proposals to be well intended, but say workers have a lot to learn on annuities

Feb 3, 2012 @ 3:47 pm

By Darla Mercado

Now that the Treasury Department has made it easier for retiring workers to access annuities, plan sponsors and advisers will have to deal with the hard part: Getting employees to understand them.

Yesterday, the Treasury announced a regulatory proposal that would make it easier for retirees to get some of their benefits through a lifetime stream of income.

There are two major focal points in the proposed rule. One allows participants in defined benefit plans to take their savings in the form of an annuity plus a lump sum, as opposed to having them choose between one or the other. The second makes it easier for workers to use some of their savings to buy longevity insurance — an annuity that doesn't begin paying out until the owner is at an advanced age — by adjusting the way tax laws governing required minimum distributions from 401(k)s and IRAs apply to these annuities.

Insurance industry participants cheered the Treasury's decision, but observers noted that there was a long way to go before employees and plan sponsors could make these features a regular part of their retirement plans. For instance, there's the question of who would be on the hook for helping employees understand the pros and cons of socking away part of their retirement savings into annuities, especially the newer and less familiar longevity insurance.

“The annuity is a really complex product: You're trying to provide an understandable education for unsophisticated investors and do it broadly, but who's going to be responsible [for doing this]?” asked Bing Waldert, director at Cerulli Associates Inc. “There are some record keepers who are doing a decent job on how to save, but flipping this over to the distribution phase is complicated.”

Part of the issue lies in the fact that while there are regulatory guidelines for providing participants education when it comes to using accumulation products in a retirement plan, those guidelines — known as the Labor Department's Interpretive Bulletin 96-1 — have not been updated to address decumulation products. Essentially, the bulletin permits investment education for workers without having it be considered as investment advice. Plan sponsors and industry groups have also been anxiously awaiting a “safe harbor” provision from the DOL that would protect plan sponsors when they incorporate insurance products into their plans.

The American Council of Life Insurers has been among the groups in contact with the Labor Department seeking an expansion of Interpretive Bulletin 96-1 to include lifetime income products. “I think when employers are comfortable with what they can do, then you'll get more activity in this space,” said Jim Szostek, vice president of taxes and retirement security at the ACLI.

Industry observers have a variety of opinions as to what exactly workers should know about annuities once these options are made available.

Mr. Szostek said that workers should be encouraged to think about what they have to pay for in retirement, what they have socked away in savings and how much they'll need to allocate toward the annuity to cover their costs.

Adviser Jeff Acheson of Schneider Downs Wealth Management Advisors LP, however, noted that understanding the financial strength of the carrier and the nuances of a product, including the cost and the portability of the annuity, ought to be top priority for workers and plan sponsors alike.

“I fear people will choose the annuity, pay the costs, and then find out they can't live on it in retirement,” he said. “Are you locked into this annuity option that you can't walk away from?”

Naturally, since some workers are going to commit a portion of their plan assets to an annuity, that leaves less money for other investments and keeps some assets out of play in the highly-lucrative rollover space.

“The market would more likely be people who aren't going to be on advisers' radar screen: People with less than $100,000 or $200,000,” Mr. Waldert said. “But you'd probably lose some rollovers.”

Plan sponsors also need to be aware that when choosing insurers, they're expected to stick with the same due diligence process involved as when they select financial advisers, record keepers and other service providers. Similarly, they need to be aware that any one annuity option won't work for all plans. “You need to assess the needs of the plan's demographics,” Mr. Acheson said.

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