Should annuities be mandatory for 401(k)s? Fund companies go on the offensive

Participants in 401(k) plans do not want the government to require them to convert a portion of their 401(k) assets to annuities, according to the results of a survey of about 3,000 households released today by the Investment Company Institute.

Participants in 401(k) plans do not want the government to require them to convert a portion of their 401(k) assets to annuities, according to the results of a survey of about 3,000 households released today by the Investment Company Institute.

The results of the survey aren’t surprising, given that the IC I represents mutual fund companies. Some $7.5 trillion is invested in 401(k) plans and individual retirement accounts, about half of which is invested in mutual funds.

The release of the research indicates that the mutual fund industry intends to resist proposals discussed in Washington to reduce tax breaks for 401(k)s and to impose more government controls on the plans, such as mandating investment options.

“Government should not be making those decisions for them,” ICI president and chief executive Paul Schott Stevens said in summarizing the ICI survey of 401(k) participants, which was conducted in November and December. “They really value the independent control that they have over the way they invest and manage those accounts. They don’t like mandates. They don’t like government micromanagement.”

Mr. Stevens, speaking at a press conference in Washington on Friday, also opposed a plan being considered by the Treasury and Labor departments to require that a portion of 401(k) balances be converted to annuities to guarantee lifetime income for retiring workers. About 96% of the respondents in the ICI survey said retirees should make their own decisions about managing retirement assets and income, while more than 70% disagreed that the government should require retirees to trade a portion of their retirement plan accounts for a contract that promises to pay them income for life.

“They want the maximum amount of choice, so if you want to take an annuity, great,” said Jack Brennan, chairman emeritus of The Vanguard Group Inc., who also spoke at the press conference. “But don’t force it, because it’s not for everyone.”

J. Mark Iwry, senior adviser to Treasury Secretary Timothy Geithner and deputy assistant secretary for retirement and health policy, co-authored a paper before joining the Obama administration that recommended having a portion of a retiring worker’s 401(k) assets automatically invested in an annuity — unless the employee opts out of the program.

The Treasury and Labor departments are likely to issue regulations this year to make it easier for companies to offer “automatic annuities” in 401(k) plans, Mr. Iwry said last September.

The Labor Department has also issued a request for information on what the agency can do “to make sure people don’t outlive their retirement savings,” said Joseph De Wolk, spokesman for the agency. “It is about encouraging people to provide information” about what the government could do, he said.

The American Council of Life Insurers opposes mandated annuitization, said ACLI spokesman Jack Dolan. “But we certainly support fully Labor and Treasury’s efforts to examine how 401(k) plan participants can be encouraged to make annuities a bigger part of their retirement income.”

The life insurer group supports legislation introduced by Sen. Jeff Bingaman, D-N.M., that would require plan sponsors to demonstrate to plan participants how much monthly income they are likely to receive from their 401(k) savings, he said.

At today’s press conference, mutual fund industry officials also rebutted criticisms of target date funds, which they said have become a valuable tool that enables workers to manage their 401(k) accounts better. Target date funds have come under heavy criticism in Congress because funds that were advertised for workers nearing retirement had widely varying results during the recent market downturn.

But mutual fund industry officials said employers need to provide better disclosures about target date funds. Some studies have shown that many 401(k) participants invest in target date funds as well as other investments in 401(k) plans, said Mellody Hobson, president of Ariel Investments. That is not the way target date funds are intended to be used, noted Ms. Hobson, who spoke at the press conference.

“To us that suggests more education is necessary,” she said. Participants also need to better understand how different funds invest target date funds, she added.

The ICI study found that Americans are generally satisfied with their 401(k) plans, with 73% of the survey respondents expressing confidence that the plans can help them meet their retirement goals.

In addition to improving disclosures about target date funds, the ICI also called for changing distribution rules for IRAs so that account holders would not have to begin taking distributions by age 70½. ICI also called for increasing opportunities for payroll deductions into IRAs, improving disclosures about all investment options in 401(k) plans, and offering more opportunities for simplified plans to encourage small employers to offer 401(k)s.