The government is hoping that its upcoming support for lifetime-income solutions such as annuities will encourage companies to add these options to their retirement plans for employees, but some worry that Uncle Sam isn't giving a big-enough push.
The Labor Department early next year plans to propose rules on how retirement plan statements should show the benefits that a stream of income can offer a retiree, compared with taking a single lump-sum payment. The Treasury Department plans to offer guidance before the end of the year on how plan sponsors can educate participants about annuities without crossing the line into providing investment advice, officials said.
The efforts are part of the government's overall goal to curb the number of individuals who are likely to outlive their retirement savings as people live longer and are more dependent on defined-contribution plans, where employees direct their investments. Companies mostly have stopped offering defined-benefit plans, which promise retirees a defined monthly payment.
The need for a solution is great. About 47% of Americans born between 1948 and 1954 are at risk of being unable to afford basic expenses and uninsured health care costs through retirement, according to the Employee Benefit Research Institute.
“Having a requirement that statements show what a monthly payment would be like would spur savings,” said John Little, the Insured Retirement Institute's senior vice president for federal affairs. “When people see the lump sum, they think, "Wow, I have a lot of money,' but annuities allow people to have a fixed income that lasts a lifetime.”
This year, the government began including on its statements for federal employees' Thrift Savings Plan the value of a monthly payment for life, based on the account balance. It notes that the amount “is for educational purposes only,” and recommends that participants look into “all of the TSP withdrawal options.”
This change has boosted savings rates, Labor Department officials said.
The department's proposal will specify how to calculate monthly-income equivalents for 401(k) statements, such as whether those values will be based on the current account balance or whether the estimate will be based on projected asset growth and additional contributions, said Michael Davis, deputy assistant secretary for the agency's Employee Benefits Security Administration.
'SAFE HARBOR'
But more is needed before companies widely offer lifetime-income products within the retirement plans they offer employees. Surveys show that just a small number of DC plans, probably 1% or less, currently offer annuitylike options.
The Labor Department will need to offer some “safe harbor” protection to plan sponsors so that their decisions about which lifetime-income products to make available to employees doesn't open them up to new fiduciary liability, industry experts said.
“Offering an illustration on a statement makes participants aware of how much money they need,” said Larry Goldbrum, general counsel of The Spark Institute Inc., which represents the retirement plan services industry. “But it doesn't encourage or facilitate greater availability of income options within plans.”
The safe-harbor issue has been especially difficult for the Labor Department, which along with the Treasury Department received opinions from 800 individuals, businesses and associations when the agencies asked for comments 20 months ago on lifetime-income options.
The Labor Department still is working through that issue, Mr. Davis said.
“Selecting an annuity partner is very different than selecting an investment manager that you can hire and fire easily without additional entanglements, like you have with an annuity provider,” he told attendees at a Financial Services Institute Inc. meeting in Washington this month.
UNITED TECHNOLOGIES
Increased demand from companies for choices among lifetime-income products and increased usage by the participants who have the options also would help, Mr. Goldbrum said.
In one positive sign, two weeks ago, United Technologies Corp. said that it will make a lifetime-income option available for employees by June. That is the largest company to do so thus far.
“When a program like United Technologies' demonstrates success, it will help move the ball in this direction,” Mr. Goldbrum said. “They are leading the way as a plan sponsor.”
AARP supports efforts to boost investor access to income-producing retirement products, and the market's recent volatility makes the group ever more insistent.
“The long-term trend of moving away from DB plans and the volatility we've seen in the markets have taken a toll on people in terms of their retirement income security and their peace of mind,” said David Certner, AARP's legislative-policy director. “Being able to address this need, given the change in plans, as well as what's happening in the market, is an important direction for future retirement income security.”
Although annuities are criticized for their cost and complexity, the economic cycle has boosted the attractiveness of the income stream they guarantee. Survey data suggest that financial advisers are increasingly using annuities in client portfolios.
NOT FOR EVERYONE
“Investors and advisers should view annuities as insurance, not investments,” said Scott Thoma, a member of the investment policy committee for
Edward Jones, which has 11,645 advisers. “Annuities are not appropriate for everyone.”
Mr. Thoma said certain factors suggest that an individual may be well-suited for an annuity. These include if they are healthy and expect to live a long life, if they have stable spending habits, if they aren't worried about leaving a legacy (because of the cost of buying the annuity will cut into the estate) and if they are taking out more than 6% a year from their portfolios.
The government increasingly is looking to annuities as part of a solution for Americans worried about how they will pay for all the years of their retirement.
According to a Government Accountability Office report in July, middle-income households should consider delaying
Social Security benefits until 70 if they don't have traditional pensions, and should consider using a portion of their savings to buy an inflation-adjusted annuity for support during the early years of retirement. The report defines middle-income as having a net worth of at least $350,000, including homes.
“The risk that retirees will outlive their assets is a growing challenge,” the report said.
Email Liz Skinner at [email protected]
