Many observers say that putting at least part of 401(k) plan assets into an annuity, rather than presenting workers with only a lump sum at retirement, to spread out retirement income is a good idea that would require regulatory changes.
Workers “are going to need to have some sort of guaranteed stream of payment to survive at a certain level” and avoid becoming a burden to their families, says Jack A. Abraham, a principal with PricewaterhouseCoopers in Chicago. Providing annuities “is one of the keys” to addressing this issue to get back to a “secure system that’s not based on cash” or on a participant’s investment savvy, he says.
Annuities are a 401(k) investment approach the federal government is considering. The U.S. departments of Labor and the Treasury are reviewing rules under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code to determine whether workers’ retirement security could be enhanced by facilitating access to annuities. This is an ongoing project, a DOL spokeswoman says.
Arthur Conat, Chicago-based executive director of the performance and rewards practice at Ernst & Young, says there are people who “may want to have some form of securitized income and right now the 401(k) does not provide, within its own structure, the ability to truly annuitize” and provide a guaranteed future income stream in exchange for a payment today.
“I think companies are concerned about the fiduciary implications of offering annuities,” says Pamela Hess, director of retirement research at Lincolnshire, Illinois-based Hewitt Associates Inc. “It’s a pretty big undertaking for an employer to do, and there doesn’t seem to be much protection for them.” When “you look at all the [insurers] that have failed over the past few years,” embarking on a decades-long partnership with an insurer to offer annuities is “kind of scary,” she says.
Once such a partnership is established, “it’s very difficult to unwind.” Many plan sponsors “aren’t quite comfortable with it and with the fiduciary implications of that,” Hess says.
“I think there is definitely regulatory change that would help make annuities easier to manage than they are currently,” says Bill McClain, Seattle-based principal with Mercer.
Greg Burrows, senior vice president of retirement and investor services at Des Moines, Iowa-based Principal Financial Group Inc., says he was encouraged that Labor and Treasury are “recognizing the value of income annuities to manage income and provide an income stream for people in retirement.”
He says that while his company does not endorse the idea of mandating this option, “we do endorse the idea” of proper incentives and the proper safe harbors for employers that wish to offer annuities. “We think they serve a very important place” in helping people managing their retirement.
In testimony before the Senate’s Special Committee on Aging in June, Assistant Secretary of Labor Phyllis C. Borzi said the biggest disagreement among those who responded to a request for information on the issue was whether the government should mandate annuities as a distribution option.
Meanwhile, William S. Harmon, vice president, 401(k), at Greenwood Village, Colorado-based Great-West Retirement Services, a unit of Great-West Life & Annuity Insurance Co., says his firm has SecureFoundation, a product that offers guaranteed income investment options within a defined-contribution plan, and that other insurers have similar products.
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