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Does Your Defined Contribution Plan Offer Lifetime Income Options?

Those workers lucky enough to have a pension plan from their employer receive a stream of income payments during retirement that will last as long as they live.  Most workers, however, have defined contribution plans like 401ks instead of pensions.  The majority of 401k plans don’t have annuities within them, despite many experts touting the necessity of annuities within defined contribution plans.  This leaves the task of creating lifetime income to the employee and this task can be daunting.  Andrea Coombes researched “Why you don’t (yet) have an annuity in your 401 (k)” for her Marketwatch article.

Consulting firm Towers Watson recently researched workplace retirement plans and found that only 12% of medium and large sized employers offer some type of lifetime income option within their retirement plans.  The surveyed companies that offer a lifetime income option had three choices available.  Only 9% allowed the employee to roll their savings into a traditional company pension while 18% offered employees help purchasing an outside annuity with their retirement savings.  But 73% of the companies offered an annuity within the retirement plan.  Last year’s Treasury rulings are likely to increase the percentage of companies offering a lifetime income option within their defined contribution plans.

The first ruling allows for easier use of Qualified Longevity Annuity Contracts (QLAC) within retirement plans.  These deferred income annuities, also known as longevity annuities, help ensure that you don’t run out of money late in life when it would be hard to earn income.  The other Treasury ruling made it easier to use annuities within target-date funds to help provide income throughout retirement.  AIG has already made changes to one of their annuities so that it complies with the new guidelines.  The annuity industry is likely to introduce many more products this year that comply with the Treasury guidelines.  The article points out that these changes will occur slowly and the industry still has to work to change some retirees’ perceptions of annuity products.

One of the biggest roadblocks keeping employers from offering annuities in retirement plans is their concern over fiduciary responsibility.  They have been lobbying the Labor Department to come up with a safe harbor to keep them from getting sued in case something happens with the insurance company providing the annuity payments.  Towers Watson found that 41% of employers listed fiduciary risk as the reason they don’t offer lifetime income options within their retirement plans.  Financial expert Steve Vernon says that ERISA lawyers think that the fiduciary risk argument is overblown and that employers are safe as long as they can demonstrate that they went through a thoughtful process when choosing their plans.  The Institutional Retirement Income Council hopes that the government will provide employers a safe harbor for offering lifetime income options in retirement plans just like they did for target-date funds with the Pension Protection Act of 2006.

Annuities certainly offer a lot of benefits to retirees, but there are challenges associated with using them as well.  Forty-one percent of the companies surveyed said that “administrative complexity” keeps them from offering annuities within their retirement plans.  Employers worry about the costs and their ability to switch record-keepers if the same annuity is not offered elsewhere.  Another issue is that employee participation is low for the companies that do offer annuities as lifetime income options in their 401k plans.  Insurance companies argue that employers need to better educate employees on the benefits of annuities.  The issue might be that they don’t know enough about annuities to ask for this solution for their retirement income needs.  There is still a lot of work to be done before annuities become mainstream in retirement plans, but their potential as an income stream solution is obvious.

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