Some top retirement gurus are in the process of developing proposals that could make annuity products a crucial part of millions of Americans' retirement plans.
This movement, which is being led by retirement experts from the Brookings Institution in Washington, is still young. However, it is gaining steam in its bid to persuade lawmakers and employers that guaranteed-income products should be a critical component of the nation's 401(k) system — particularly as more than 75 million Americans are expected to stop working and search for sources of retirement incomes during the next two decades.
“It's in the early stages, but there has been a fair amount of interest in our ideas and the core concepts so far,” said J. Mark Iwry, one of the chief architects of the annuity initiative. He joined the Obama administration last week as deputy assistant Treasury secretary for retirement and health policy.
Through the Retirement Security Project, a Washington-based advocacy offshoot of Brookings and the Public Policy Institute of Georgetown University in Washington, Mr. Iwry and other retirement experts are proposing ideas that could, among other things, allow 401(k) participants to “test drive” annuities, or perhaps have their employers' matching contributions steered into a deferred annuity during their working years.
It might also be necessary to call on lawmakers to create a federal guarantee program to back annuities, much like the support the Federal Deposit Insurance Corp. provides to standard bank accounts, said William Gale, vice president and director of the economic studies program at Brookings.
“People are worried about the state and the health of insurers at the moment,” said Mr. Gale, who is also the director of the Retirement Security Project.
“An annuity contract is asking them to engage in a long-term relationship, involving a substantial portion of their money, with a single provider,” he said. “That may be viewed as too much of a concentrated risk for a lot of people.”
The Retirement Security Project and Mr. Iwry, who will also serve as a senior adviser on retirement issue to Treasury Secretary Timothy Geithner, are no strangers to introducing influential retirement policies.
Along with scholar David John of The Heritage Foundation in Washington, Mr. Iwry created the automatic individual retirement account plan that the Obama administration plans to enact next year.
Although it may be too soon to tell if the Retirement Security Project's latest efforts will materialize with an equal level of success, Mr. Iwry said that “there has been interest on both sides of the aisle” in increasing annuity usage within 401(k) plans.
The need for including guaranteed-income offerings in 401(k) plans has been highlighted by the dramatic decline in equity markets in recent months, which has sucked nearly $2 trillion out of the defined contribution system and ravaged older individuals' primary sources of retirement income.
The presence of annuities in 401(k) plans, however, could shore up the stability of this system, Brookings officials contend.
To date, just 20.5% of companies offer annuities to their workers, according to the Chicago-based Profit-Sharing/401k Council of America. What's more, usage has decreased in recent years.
Participants have generally shied away from annuities in their 401(k) plans because of the pricing and complexity of most offerings, Mr. Gale said.
“You're essentially asking people to pay more money for something they're uncomfortable with,” he said. “That's not a very compelling proposition.”
One of the proposals from the Retirement Security Project — an “automatic trial income strategy” — would address both these issues specifically.
This concept would involve automatically placing about half of a participant's 401(k) assets at retirement into a “trial income plan” that would pay out a monthly income to an individual for a period of two years.
Workers could opt out of the trial, Mr. Gale noted. But by automatically placing individuals into such an annuity program, most 401(k) participants would have easy access to a lifetime-income offering and would also be given the opportunity to establish a familiarity with such products by test-driving them over a prolonged period.
At the same time, the trial program would increase the number of annuity users — and assets — in a 401(k) plan, which would allow employers to negotiate for better institutional pricing from annuity providers.
“This has the potential to deal with many of the issues that have kept people from using annuities,” said Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute in Washington. “An automatic concept would change behaviors and encourage usage through inertia alone. People would simply get used to it.”
Mr. Iwry is in the process of putting the finishing touches on another lifetime-income proposal that would complement the trial income concept. This proposal would involve a phased, or incremental, acquisition of deferred annuities inside a 401(k) plan, which would encourage individuals to put money into an annuity consistently throughout their careers — a factor that could eliminate any element of an “all-or-nothing” decision, he noted.
Under this proposal, these incremental annuity purchases could be made using employers' matching contributions or they could be embedded into 401(k) plans' default investment options — such as target date funds.
E-mail Mark Bruno at [email protected].
