American retirement security now ranks as a top concern of the White House, right up there with unemployment and the federal budget deficit. In a joint announcement Thursday, the Departments of Treasury and Labor unveiled two executive actions to
expand the transparency of 401(k) fees and broaden the availability of retirement plan payout options to encourage the use of annuities to provide lifetime income.
The biggest challenge for many retirees is figuring out how not to outlive their money. Traditionally, the most comprehensive solution to the challenge of retirement security has been to replace the paycheck retirees receive when they were working with a guaranteed and predictable stream of lifetime income, such as a defined benefit pension or life annuity. Yet, over time, the use of annuities and other lifetime income in retirement plans has been diminishing as the number of traditional pension plans has declined and the more common defined contribution plans, such as 401(k) plans, typically offer a lump-sum payout option.
The Treasury and Labor Departments' initiative is designed to put the “pension” back in the private retirement system. Currently, a number of regulatory barriers reduce the availability and take-up of lifetime income options in employer-provided retirement plans. The administration's package of proposed regulations will make it easier for retirement plans to offer workers a wider range of choices as how to receive their benefits.
--Make it easier for retirement plans to offer combination options that avoid an “all-or-nothing” choice, such as the option to take a portion of an individual's plan benefit as a stream of regular monthly income payable for life, while taking the remainder in a single lump-sum cash payment. A simpler method of calculating partial annuities should make plans more willing to offer and emphasize the option of a partial annuity with a partial lump sum.
--Remove a key obstacle to “longevity annuities”. Another proposed regulation would help open up the 401(k) and IRA market to longevity annuities by giving special relief from the minimum distribution requirement. As long as the annuity costs no more than 25% of the account balance or up to $100,000, whichever is less, and will begin payouts by age 85, it would not be subject to RMD requirements before the annuity begins.
--Clarify rules for plan rollovers to purchase annuities. Employees receiving lump-sum cash payout from their employers 401(k) plan can transfer some or all of those amount to the employer's defined benefit pension plan (if the employer has one and is willing to allow this). This provision would give employees access to the defined benefit plan's relatively low-cost annuity purchase rates.
--Resolve uncertainty as to how the 401(k) plan spousal protection rule applies when employees choose deferred annuities (including longevity annuities) from their plans. The ruling describes various arrangements permitting employees who are not yet ready to retire, to invest their account balances in lifetime income benefits — either on a one-time basis or incrementally over a period of years — under deferred annuity contracts that will begin payments at retirement or later. The guidance identifies plan and annuity terms that will automatically protect spousal rights without requiring spousal consent before the annuity begins.
“This package of proposals gives aging baby boomers one more option — a very powerful option — to create a paycheck for life so they don't run out of money in retirement,” said Jim Szostek, Vice President of Taxes and Retirement Security for the American Council of Life Insurers.
Together, the administration's proposals could be a game changer for the retirement industry and financial advisers. Not only could it provide for a more secure retirement for many Americans, but it could alter the future retirement rollover market with a larger portion of assets being converted to annuities when workers retire, leaving fewer assets to be managed privately. Out of $11.2 trillion of private pension assets in 2011, only 21% were maintained in defined benefit plans, which traditionally offer a lifetime payout option. Of the remaining assets, 36% were held in defined contribution plans, such as 401(k) plans, and 43% in IRAs, according to the Federal Reserve Board. Those figures do not include retirement plans for federal state and local government employees.
