Treasury, IRS OK annuities in 401(k) target date funds

Treasury Department rule change allows retirement plan participants to mix annuities with other savings options.

Oct 24, 2014 @ 10:26 am

By Mark Schoeff Jr.

Treasury Department and IRS approval on Friday of the use of annuities in target date funds in 401(k) plans, including as a default investment, will make lifetime-income features more popular and help ensure that droves of baby boomers don't outlive their nest egg, industry officials and experts say.

The Department of Treasury released guidance for plan sponsors on how they can expand the use of deferred-income annuities, providing a special rule that allows defined-contribution plans to offer target date funds that include annuities among their assets.

“All kinds of guarantees will get more attention from plan sponsors as solutions to provide retirement income from TDFs,” said Jamie Kalamarides, senior vice president of institutional investment solutions for Prudential Retirement. “Continuing to make these small steps is critical for the retirement security of the U.S.”

Treasury will permit deferred annuities to be offered at prices that vary with a participant's age. That means discrimination rules would no longer apply if the plan includes both people who are younger than the age limit for the annuity and those who qualify for the annuity.

The department also will allow retirement plan participants to mix annuities with other savings vehicles.

“Instead of having to devote all of their account balance to annuities, employees use a portion of their savings to purchase guaranteed income for life while retaining other savings in other investments,” Treasury said in a statement.

In addition, the Department of Labor OK'd the use of target date funds with annuities among their fixed income investments as default investment alternatives.

The agencies' moves will make plan sponsors more comfortable adding retirement-income guarantees, said Jason Roberts, chief executive of the Pension Resource Institute.

“This is the tip of the spear, really,” Mr. Roberts said. “We need more guidance and interpretation, but it's paving the way.”

The Treasury rule will make target date funds “more robust” investment products by allowing them to include annuities along with equities and bonds, said Lauren Prince, owner of Prince Financial Advisory.

“It's making it like target date on steroids,” she said. “The idea of guaranteed income for life is very powerful. Something needed to be done to enable 401(k)s to do their jobs. I've seen a lot of mediocre retirement plans out there.”

Ms. Prince supports Treasury's effort to boost retirement security, but said that while the new TDF rules “sound good on paper,” it remains to be seen whether they will be effective.

“There are a lot of unanswered questions,” she said. “It depends on how [a plan] is constructed, how well it's explained to participants and the fees.”

Despite lingering questions, Bruce Ashton, a partner at Drinker Biddle & Reath, is expecting serious growth in the use of deferred-income annuities in retirement plans.

“Whoever requested this guidance is going to start a marketing campaign around it,” he said.

An organization that promotes annuities agrees that demand for the products will increase.

“We think that they'll become very popular,” said Lee Covington, senior vice president and general counsel at the Insured Retirement Institute. “The market reacts very quickly.”

Treasury finalized over the summer a rule that facilitates the use of deferred-income annuities in retirement plans.

“Treasury is working to expand the availability of retirement income options for working families,” J. Mark Iwry, Treasury deputy assistant secretary for retirement and health policy, said in a statement. “By encouraging the use of income annuities, today's guidance can help retirees protect themselves from outliving their savings.”


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