Proposed legislation could help encourage your clients to consider rolling over 401 (k) plans into retirement annuities. The legislation, Senate bill 2832, would amend the Employee Retirement Income Security Act of 1974, to focus greater awareness on lifetime income retirement planning.
Under the bill, sponsors of 401 (k) plans and other private defined contribution plans would be required to show annually, on one pension benefit statement, how the value of retirement accounts translates into guaranteed monthly payments. The bill, introduced on Dec. 3, would require calculation of payments, based on such factors as age at retirement.
Currently, most private retirement plans only provide participants with lump-sum values.
“Looking only at the lump-sum value of your retirement plans is a bit like reading every-other page of a book…”says Frank Keating, president of the American Council of Life Insurers. “How that lump sum translates into regular income is the other, and equally important, half of the retirement savings story. Workers should examine retirement strategies and products that guarantee lifetime income.”
Sponsored by U.S. Senators Jeff Bingaman (D-NM), Johnny Isakson (R-GA) and Herb Kohl (D-WI), the bill was referred to the Committee on Health, Education, Labor and Pensions. However, at this writing, there was no companion bill in the House of Representatives.
Might such a federal requirement jump-start plan sponsors into adding variable annuities with guaranteed lifetime withdrawal benefits or immediate annuities to their defined contribution plans? One thing is certain: If adopted, the legislation would impact more than $3 trillion in defined contribution plan assets, according to the Employee Benefit Research Institute, Washington, D.C.
“I think this is a great idea and would be real wake-up call for many,” says Peter Welsh, a Chicago-based employee benefit consultant. “Receiving a lump sum or managing lump sum account balance at retirement places a tremendous amount of responsibility on individuals who up to that point have only been concerned with spending, not saving.”
As it stands, lifetime income disclosure calculation would be based on the joint and survivor immediate annuity calculations. This information could be used in conjunction with the social security statement to piece together a client’s retirement income security puzzle.
The act does not require that participants be offered annuities at retirement or that they be defaulted into them. However, Jacob Herschler, senior vice president of Prudential Financial’s annuity business, believes that it could cause employees to see their 401(k) accounts not as a lump sum, but rather the generation of a source of lifetime income they will invest.
“This should generate more interest in 401 (k) rollovers into IRAs with variable annuities that offer guaranteed lifetime withdrawal benefits,” Herschler says. ”Advisors can talk to clients about rollovers and guaranteed income protection when their retirement accounts fall in value.”
Benefit consultant Welsh believes the act could lead to greater use of immediate annuities.
“It is not a big leap to that at some point in the future,” he predicts. “Employees will be annuitizing their 401 (k) accounts more than taking lump sums.”
Welsh says the measure is expected to generate more interest in using single premium immediate annuities than in variable annuities that pay a guaranteed lifetime withdrawal benefit because the immediate annuity provides more income. But variable annuities still may be popular with retirees who want greater liquidity.
Noel Abkemeier, actuary at Milliman Inc., Williamsburg, VA, agrees. But Abkemeier suggests that you might also see structured mutual fund withdrawal programs that pay out 4 percent annually or a deferred-start income annuity. This type of annuity, with a current premium, provides a guaranteed income that starts at a specified later date. This could facilitate a smooth transition from accumulation to income if purchases are made over a specified period.
“For persons who are serious about guaranteeing an income, the single premium immediate annuity could be attractive because it provides the largest income,” he says. “The variable annuity and mutual fund approaches may be less attractive than they would have been three years ago since confidence in the stock market is shaken and the income guarantee is far less than what a (Single Premium Immediate Annuity) offers.”
Despite the benefits of turning defined contribution assets into lifetime income, Abkemeier believes plan sponsors are hesitant to use insurance products.
“Plan sponsors historically have been reluctant to get involved in product issues unless forced,” Abkemeier says. “They may feel that their fiduciary responsibilities deter them from appearing to endorse any product. This may make it difficult to get products inside plans. It may also deter involvement at the time of retirement.”
Jamie Kalamardies, senior vice president of Prudential’s Retirement Solutions division, argues that every type of retirement plan covered by ERISA--except 401 (k) plans—already contain life insurance offerings. The bill, he suggests, would inspire more plan sponsors to think about guaranteed lifetime income for 401(k) plans.
Kalamardies says that Prudential’s “Income Flex,” product is a guaranteed lifetime withdrawal product already used by 225 plan sponsors. Also offering some type of income annuity in corporate defined contribution plans: Genworth, MetLife and Hartford.
“Among the retirement income options that seem to be of the greatest interest to both plan sponsors and public policymakers are fixed deferred income annuities, living benefit riders, target date funds with an annuity inside, immediate income annuities and longevity insurance, says Jody Strakosh, national director for retirement products for MetLife, New York. In a MetLife annual employee benefit trends survey, Strakosh says, half of all respondents express a strong interest in their employers providing ways to convert retirement plan lump sums into income for life.