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Annuities and 401k’s?

Here’s an article I found on yahoo finance about annuities and 401k’s belowby Robert Powell.

Annuities in your 401(k): It’s beginning to seem less a question of whether and more a question of when and how.

This week, a bevy of retirement-income experts said annuities should be offered as a 401(k) investment option as well as a default distribution option for when workers leave a company. The experts were speaking at a two-day hearing on lifetime-income options for retirement plans hosted by the U.S. Labor Department’s Employee Benefits Security Administration (EBSA) and the Treasury Department.

From this vantage point, it seems like a done deal, and the only questions remaining are those dealing with safe harbor rules, fiduciary requirements and the in-the-way details.

For instance, insurers and others want the government to include lifetime-income options as safe-harbor investments. In effect, plan providers and others want to make sure that advisers and plan sponsors don’t get sued over any recommended lifetime-income products.

Those and other issues are not insignificant. They must be addressed before Labor and Treasury let annuities become a staple of the $4 trillion 401(k) market. Here’s a sampling of the obstacles that must be addressed.

By Choice, Not Default

In his testimony, Christopher Jones, Financial Engines’ executive vice president of investment management and chief investment officer, said his company believes that any proposed default retirement-income solution must avoid placing participants into a situation where they could permanently lose access to their money without having made an explicit choice.

In other words, plan participants should be asked if they want to invest their 401(k) money into an annuity when they leave their employer. That transfer shouldn’t happen automatically, especially as it’s an essentially irreversible decision, or, if not irreversible, certainly a costly decision to reverse given the penalties.

According to Jones’ testimony, transferring accumulated 401(k) assets is a complex and high-stakes process. There “needs to be flexibility and choice on behalf of 401(k) participants and plan sponsors,” he said.

Education and Annual Income Projections

Not surprisingly, a representative from one of the nation’s largest sellers of annuities wholeheartedly supported adding annuities as a default option.

“One of the benefits of offering affordable, easy-to-understand annuities within a retirement plan is that it ensures plan participants receive a constant reminder that they are saving not just to accumulate wealth, but also to help workers approach retirement with peace of mind, knowing they will have income to last a lifetime,” Paul Van Heest, senior vice president, retirement plans of TIAA-CREF, said in his testimony.

But it’s not enough to add annuities in the absence of education and other information. For instance, he said investors considering lifetime-income annuities should understand it’s not always necessary or required to use all of one’s retirement savings when purchasing an annuity. TIAA-CREF, for instance, tells participants to buy an annuity that will provide the necessary level of income to cover basic expenses.

Also, Van Heest said retirement plans need to provide workers, at least annually, with an illustration of how much projected retirement income their current account balance would provide. (The Lifetime Income Disclosure Act, sponsored by Sen. Jeff Bingaman (D., N.M.), with co-sponsors Sen. John Isakson (R., Ga.) and Sen. Herb Kohl (D., Wis.), would require all retirement plan participants to receive, at least annually, an illustration of how their current accumulation would translate into income at retirement.)

No Portability

Plan participants aren’t clamoring for in-plan annuities at the moment. That’s one reason why some employers don’t want to offer such options to their workers. But the other reason is this: There’s little if any portability; it’s near impossible for a worker to transfer an in-plan annuity from one employer-sponsored 401(k) to another. And that leads to another issue that must be solved. Plan sponsors don’t want to get sued for not offering lifetime income products either as an in-plan or distribution option.

States Must Fix Insurance Laws

Most states have guaranty funds to help pay the claims of insurers and annuities that go belly up. The amount varies from state to state, but typically it’s between $100,000 and $300,000. That’s certainly a problem for those who might invest more with one single issuer than what the guaranty fund protects. The other is a regulatory hurdle that must be overcome. Living-benefit riders, a typical annuity rider, aren’t always covered by guaranty funds, according to Charles P. Nelson, president of Great-West Retirement Services.

Market Demand and Need

In the end, one of the biggest hurdles is whether workers want annuities in their retirement plans. Based on the almost 800 letters the Labor Department received in response to its request for comments to its proposal, average Americans in general don’t want a lifetime-income annuity.

“Do you think Americans are IDIOTS?” asked Ross L. Webster in his comment letter. “You would like to take our hard earned money in IRAs and 401(k)s that WE CONTROL and promise a lifetime annuity that we can trust you to pay in the future?”

To be sure, there are many reasons why Americans don’t want an annuity option in their 401(k)s. But here’s one of the more sound reasons, according to Vanguard: “Participants already receive meaningful protection against market and longevity risk from Social Security benefits and any traditional pension income,” Stephen P. Utkus, principal of Vanguard Center for Retirement Research, said in his testimony. “They have other ‘annuitized’ wealth in the form of Medicare benefits and, for many, a primary residence. These factors reduce the need for additional annuity income and enhance the desire for holding a portfolio of savings.”

In other words, Utkus is saying most plan participants don’t need an income annuity as a 401(k) distribution option. Instead, all they need to do is withdraw 4% per year from their retirement accounts.

Robert Powell has been a journalist covering personal-finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News. Powell is the editor of Retirement Weekly.

Source of article:  http://finance.yahoo.com/focus-retirement/article/110756/annuities-may-be-coming-to-401ks?mod=fidelity-managingwealth

Is an annuity right for you?

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Still Got Questions?

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Binh Nguyen

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admin@401krollovers.info

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Need Help With 401k Rollover?

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Binh Nguyen

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admin@401krollovers.info

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