For millions of Americans, the odds of living comfortably during retirement will be significantly improved by a newly announced regulatory initiative aimed at making sure that retirees don't run out of money.
The initiative involves a set of proposed regulations by the Treasury Department and the Internal Revenue Service intended to encourage employees and retirement plan sponsors to embrace “longevity insurance,” which refers to a specialized annuity that starts paying policyholders a benefit when they reach a pre-established age.
Financial advisers should seriously consider adding longevity insurance to their arsenal of tools to generate lifetime income for their clients. That arsenal, of course, also should include strategies that don't deal with annuities, such as systematic withdrawals or managed-payout mutual funds.
In an era of one medical advance after another, more people are running out of money as they age. That is made clear by the fact that in 2010, 33% of Americans over 80 counted on Social Security for at least 90% of their income, compared with 17% for 65- to 69-year-olds.
Therefore, the federal government's effort to make it easier for Americans to buy longevity insurance is commendable.
REMOVING IMPEDIMENTS
Until now, few defined-contribution plans have offered longevity insurance, in part because of technical impediments. The government's proposals would remove some of those impediments and make it easier for plan participants to annuitize a part of their savings before retirement.
Even so, annuities are, and likely will continue to be, a tough sell with retirees and many advisers. Over the years, annuities — particularly variable annuities — have gotten a bad rap from advisers for being overly complicated and too expensive.
Making matters worse, the VA industry has been plagued for years by instances of questionable — if not downright fraudulent — sales practices.
It is important to remember, however, that longevity insurance isn't nearly as complicated, or as expensive, as other types of annuities. With these, a worker buys a simple, straightforward annuity that doesn't start paying out a monthly income stream until the purchaser reaches a certain age, say, 85.
They are ideal for clients who want to maintain control over most of their retirement assets but at the same time want to insure against the risk of running out of money in the event that they live longer than they anticipate.
To be sure, more work needs to be done by the federal government if it is serious about expanding the role of longevity insurance in retirement planning. Specifically, it must update Interpretive Bulletin 96-1 to include lifetime-income products.
That bulletin, which was released by the Labor Department in 1996, identifies the types of investment materials that don't constitute investment advice for plan participants. But that guidance addresses issues only during the accumulation phase.
If the federal government is going to encourage employers to offer longevity insurance, it must expand its guidance to include lifetime-income products and the decumulation phase of retirement. Otherwise, few employers will bother promoting the insurance for fear of being seen as giving advice.
As a result, employees won't get the education they need to decide whether such insurance is right for them.
SHIFT IN FOCUS
Nevertheless, the proposals mark the beginning of an important shift in focus by the federal government, from helping Americans accumulate retirement assets to helping them make those assets last throughout their lifetime.
With 76 million baby boomers transitioning into retirement over the next 20 years — taking with them about $8.4 trillion in wealth — it is imperative that advisers shift their focus.
