By Robert Powell
A Dow Jones Column
Some folks want 'em. Some don't. That's the upshot of the 600-plus letters the U.S. Labor and Treasury departments received in response to a request for information about including income annuities as a payout option for 401(k) plans. But there's clearly no consensus on what is certain to become a political hot potato.
In February, the Labor and Treasury Departments sent out a request for information, or RFI, soliciting public comments to help the agencies determine what steps to take "to enhance retirement security" for workers in 401(k) and other employer-sponsored retirement plans "through lifetime annuities or other arrangements that provide a stream of income after retiring."
The government sought comments on a broad range of topics, including:
-The advantages and disadvantages of distributing retirement savings as a lifetime stream of income both for workers and employers, and why lump-sum distributions are chosen more often than lifetime income options.
-The type of information participants need to make informed decisions in selecting how to pay out their retirement savings.
-Disclosure of participants' retirement income in the form of account balances as well as in the form of lifetime streams of payment.
Fast forward to this week, the deadline for the RFI, and here's what we're able to glean: Government officials and lawmakers will not have an easy go of crafting new laws or regulations--at least, they won't based on all their new pen pal's comments. Why's that? Well, not surprisingly, the various industry groups' comments are predictable. Those in the business of manufacturing and distributing lifetime annuities praised these products as the perfect distribution options; those that don't offer such products didn't. Republicans hate the notion of anything that could become a guaranteed retirement account. And then there were the comments from average Joe Americans, financial advisers, academics, and other parties, which ranged the gamut.
Some Fear Government Takeover Of Plans
At one end of the spectrum, for instance, were comments such as those filed by one David Greenberg, who wrote: "There is no way I'm letting the government take over my retirement plan. My money will be going into a mattress before I give you responsibility for paying me a monthly income. I see how well Medicare and Social Security have been managed."
Other presumably average Joe citizens, held a similar opinion: "NO," one wrote. "I do not want my 401(k) annuitized. I'll take my chances on my own. Do you not realize the government, in any form, is no longer trusted in this country? Come down from your ivory towers, and talk to a few of us in the trenches."
At the other end of the spectrum, there were comments like this one from the Americans for Secure Retirement, a coalition of more than 70 industry groups, including the American Council of Life Insurers and the U.S. Chamber of Commerce. "The ASR strongly supports providing incentives that make secure retirement vehicles such as annuities more accessible and affordable. Annuities are the only product that can provide Americans with a guaranteed stream of lifetime income through retirement--a 'paycheck for life'--to ensure that they will not outlive their income.
"We urge the agencies to develop rules that will remove obstacles and provide incentives to encourage employers to provide their employees with the option to annuitize all or a portion of their defined-contribution retirement accounts, and to encourage employees to take advantage of such options."
Annuities As Default Option? Not Likely
What's the likely outcome after the Labor and Treasury Departments sift through the 600-plus letters? Well, it's anybody's guess, really. But some experts see two things happening: First, regulators and lawmakers will likely make lifetime income annuities a distribution option, as they are in other countries, and two they may tie lifetime income annuities to the existing qualified default investment alternatives (QDIAs).
According to the experts, there's really no harm in offering a plan participant the option of taking a lifetime income annuity, especially if the worker truly understands the risks and benefits of not just that option but all the distribution options they have. Today, workers in typical 401(k) plans are given the following options when they leave a plan: take the money out, roll some or all of it into an IRA, or leave the money in their former employer's 401(k) plan.
In the brave new world, workers would still have those options, plus one more: Invest some, though likely not all, of their 401(k) in a lifetime income annuity. (By the way, workers who invest in an income annuity are guaranteed income for life, which is not true if they choose one of the distribution options now available.)
But as with many things in life, the devil is not only in the details but also in the checkbooks of lobbying groups. For one, any new law or regulation would have to include provisions that protect employers against lawsuits when offering such options.
"The reasonable course is to protect employers from liability when they include lifetime income options," said Louis Harvey, president of Dalbar. "Both insurance/annuities and investment alternatives will qualify."
In addition, Harvey said regulators might require existing QDIAs to have a lifetime income option to qualify as valid defaults. And as a precaution against buyer's remorse, Harvey said regulators should also include a two year "free look" that gives retirees the chance to change their mind if they become disenchanted with the lifetime income option.
However, experts don't see lifetime income annuities becoming a mandated default option. There would be too many hurdles for that to become the law of the land. "Policy makers know that efforts to force mandatory annuitization will be vigorously resisted," said David Wray, the president of the Profit Sharing/401k Council of America. "I do not see anyone suggesting such an approach."
Wray noted that retirement is an individual experience--financial needs and appropriate financial strategies differ substantially from person to person.
From this vantage point, we see the following: The current administration would prefer that millions of people have the option of putting some or all of their 401(k) money into a product that guarantees they won't outlive their money, rather than the current system in which millions of people don't have a lifetime income option, they outlive their money, and then come cup in hand to Uncle Sam for a bail out.
That would make the too-big-to-fail bailouts of this generation seem like a small business loan.
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