Joint DOL Treasury RFI - DC Plan Annuities

[Guest Tom:]

The DOL and Treasury have jointly issued a request for responses regarding whether and how ERISA and tax regulations could enhance the offering and use of DC retirement lifetime income distribution options.

http://www.dol.gov/federalregister/HtmlDis...&AgencyId=8

Do we really need this? Will this really provide DC plan participants with guaranteed lifetime income or is it a special interest motivated effort to force participants into insurance company annuities. I thought that social security was intended to satisfy guaranteed lifetime income needs and DC plan participants who want to can lock-in lifetime income payments by rolling over their DC plan accounts into annuity IRAs. I know that DC plan participants often make the worst retirement plan investment decisions, but are annuity contracts a better idea? Annuity contracts are popular in 403(b) plans plans, so maybe they can work well in 401(k) plans as well. Does anyone have have an opinion?

[Bird]

I agree 100% (with you). This article article

states the case against annuities perfectly. The most significant point, I think, is this:

4) The real issue isn’t annuities, it’s a lack of retirement savings – Griffeth’s concern about bad behavior really emphasizes the greater issue of investors not saving enough to begin with. Paul G Escobar, Managing Director, Retirement Planning, US Wealth Management says, “Annuities don’t actually address the issue – namely that most baby boomers don’t have enough saved. This is a combination of factors from not having had a 401k plan to not having participated at all or not having participated enough.” In addition, Escobar cites “withdrawals for loans, hardships and cash outs at job changes” as other reasons for participants not having sufficient savings to retire.

Everyone wants an easy answer, so annuities are the next bandwagon "because you can't outlive the income." BFD - if you have $50,000 at age 65, annuitizing it for $200/month or whatever doesn't accomplish much.

[MoJo]

I agree 100% (with you). This article article

states the case against annuities perfectly. The most significant point, I think, is this:

4) The real issue isn’t annuities, it’s a lack of retirement savings – Griffeth’s concern about bad behavior really emphasizes the greater issue of investors not saving enough to begin with. Paul G Escobar, Managing Director, Retirement Planning, US Wealth Management says, “Annuities don’t actually address the issue – namely that most baby boomers don’t have enough saved. This is a combination of factors from not having had a 401k plan to not having participated at all or not having participated enough.” In addition, Escobar cites “withdrawals for loans, hardships and cash outs at job changes” as other reasons for participants not having sufficient savings to retire.

Everyone wants an easy answer, so annuities are the next bandwagon "because you can't outlive the income." BFD - if you have $50,000 at age 65, annuitizing it for $200/month or whatever doesn't accomplish much.

I'm not sure I agree. The article clearly states why annuities of the past are not a good idea for retirement plans. But there are other issues. Lack of retirement savings is an issue, but more important, lack of the education, tools and/or professional help in managing investment is, IMHO, far more significant an issue. We've been trying to turn participants into investors for 2 and half decades now with very marginal success. Auto features are both a response, and a partial solution. The problem is, post retirement, those tools go away. There are current efforts to provide fee transparent annuities that will eliminate or mitigate many the objections of annuities in the past. one of the benefits of having such a product as an investment choice in the plan is that it allows you to dollar cost average the return of the annuity over a working career - instead of being dependent on the interest rate environment at a single point in time - that of retirement.

I would think that the multi-million dollar bonus individuals in the financial services industry would be able to come up with appropriate solutions.....

[david rigby]

... appropriate solution?

Defined Benefit plans offer annuities more efficiently than insurance companies!

[Belgarath]

I think it's a terrible idea. Any participant who wants an annuity can buy it outside of the plan with their distribution, or a part of it.

This will just add one more layer (at least) of work/disclosure/liability for fiduciaries, to no real purpose. Our plan documents always used to allow for annuity payments until we removed the option, and participants NEVER chose them - ALWAYS chose lump sum.

I think Bird hit the nail on the head - an annuity payment doesn't really amount to beans unless you have a bunch of money! And then you get into the fixed/vs variable annuity arguments.

If Congress wants to mandate that the 402(f) notice has some sort of legisislatively approved model language discussing the pros/cons of buying an annuity with all/part of your benefit distribution, I could live with that.

[GMK]

An uninformed reader asks:

Is there a parallel to credit unions vs. banks in the annuity world? That is, if you want to invest your 401(k) lump sum in an annuity, are insurance companies the only annuity supplier option or are there also "annuity unions" or any other choices (assuming you have no access to a DB plan)? Just curious.

[Bird]

I'm not sure I agree. The article clearly states why annuities of the past are not a good idea for retirement plans. But there are other issues. Lack of retirement savings is an issue, but more important, lack of the education, tools and/or professional help in managing investment is, IMHO, far more significant an issue.

I strongly disagree with you being not sure about agreeing with me . Seriously, lack of savings IS the issue; everything else is an unfortunate distraction.

Is there a parallel to credit unions vs. banks in the annuity world?

I think the closest thing would be TIAA, and of course there is limited access. I worked with one or two people who had TIAA accounts and was impressed with the payouts they offered.

[GMK]

I think the closest thing would be TIAA, and of course there is limited access.

Thanks, Bird. That's the disappointing answer I pretty much expected.

[Bird]

FWIW, I stumbled across this in an article about baby boomers recently:

No pension. Living longer means more retirement years that will need to be financed. Most private-sector workers won't get a monthly check from their former employer in retirement or retiree health benefits. While 40 percent of private-sector workers received a traditional pension in 1975, that number declined to 17 percent by 2006, according to the Employee Benefit Research Institute. More employers freeze their pensions every year and replace them with 401(k)'s.

From 40 to 17 percent, wow...that may not be new news, and most of us sensed something like that anyway, but that's pretty dramatic. I still don't think DB plans are "better" - if employers pumped 5% or more into DC plans annually most of us would be in decent shape, but we know that's not happening, on average. You really have to wonder how many of the 83% are totally unprepared.

(The rest of the article is here if you care.)

[david rigby]

Less dollars going into the retirement program (one or more plans), then less dollars coming out in the form of benefits.

Period.