Annuities' use in 401(k) plans gets green light

The Treasury Department blessed the use of annuities within 401(k) plans in 2014, paving the way for accessible lifetime income for retirees. It was a big year for the department, which released rules in October that would permit annuities to be paired with target date funds in a 401(k) investment menu. That announcement spurred plan service providers to go back to the drawing board, as lack of regulatory clarity on whether plan sponsors could use these products kept the concept from gaining traction sooner. The October announcement followed on the heels of Treasury's guidance release in July that made it easier for employees to use money from qualified plans to purchase deferred-income annuities — income streams that would begin as late as 80. Required minimum distributions will not apply to these so-called qualified longevity annuity contracts that are purchased using 401(k) or IRA dollars.

LONGEVITY

It'll take big ideas like these to begin addressing the consequences of people living longer, and the toll that reality takes on portfolios that must last for decades. The main question on the minds of experts in retirement income is whether 2015 will finally be the year when plan sponsors welcome these insurance products with open arms. The fate of the products hinges largely on their response. “This guidance will help, but we need more plan sponsors to take that leap and add them as part of the lineup, and even as a [qualified default investment alternative],” said David Blanchett, head of retirement research at Morningstar Investment Management. What's deterring plan sponsors from using these products is the fact that it seems difficult to drop an annuity product from a 401(k) menu once chosen, should the situation call for it. “It's a big decision: If you add a mutual fund, you can fire them next month,” Mr. Blanchett said. “With an annuity, you've made a decision to provide benefits for 40 to 50 years.” Advisers also will be expected to step up their game to get plan sponsors familiar with the upcoming offerings and their differences. For one thing, deferred-income annuities are very different from guaranteed lifetime withdrawal benefits — and both provide income. “You'd have to have deep benches of financial professionals and tools to be able to assess the investment managers and the way they select and incorporate insurance products inside of the vehicles,” said Scott Matheson, senior director of investment research at Captrust Financial Advisors. “Does it change your due diligence as an adviser? It does and it should.”