Plan adds lifetime income to retirement plans
New regulations are intended to make it easier for retirees to transfer money from their 401k's into an annuity that would guarantee payments until they die.
The Obama administration has proposed new rules aimed at encouraging retirement savers to tap annuities and other products that allow them to turn their savings into a guaranteed monthly income for life.
Of two rules proposed by the U.S. Treasury and Labor departments last week, one would encourage employers and IRA providers to offer longevity insurance, also known as deferred income annuities, in 401k's and other workplace plans and individual retirement accounts.
The other proposed rule is aimed at helping employers encourage workers in traditional defined-benefit pension plans to annuitize -- that is, hand over money to an insurer in exchange for a guaranteed monthly payout for life -- at least a part of their retirement savings.
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The proposals are designed to help savers manage the risk of outliving their money, a Treasury official said in a conference call with reporters. A 65-year-old man has a 50-50 chance of living past age 84, and a 65-year-old woman has the same likelihood of living past age 86, he said.
Faced with investing their savings for the long haul in unpredictable and often turbulent financial markets, without knowing how long they need their money to last, retirees risk running short -- or scrimping unnecessarily. And while annuities have plenty of pros and cons -- and those vary widely based on the type of product -- they do act as longevity insurance, providing a steady stream of money for life.
"When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings. Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security," said Treasury Secretary Tim Geithner, in a press release.
The Treasury and Labor departments also announced a three-month delay in the effective date of new 401k fee-disclosure rules.
Hello, deferred income annuities
One of the proposals, if adopted, would make it easier for employers to offer deferred income annuities, also known as longevity insurance.
With these annuities, a worker or retiree uses part of his savings to purchase an annuity that doesn't start paying a monthly income stream until, potentially, decades into the future. For example, a 60-year-old worker would fork over 20% of his savings for an annuity that starts paying a monthly sum when that person is 85.
Some say these products are ideal for people who want to maintain control over the bulk of their money, investing it as they see fit, but at the same time would like to insure against the risk of running out of money in the event of a long life.
According to the Treasury Department, some employers and IRA providers are hesitant to offer such annuities in part because retirees must count the dollars they use to purchase this type of annuity when they go to calculate their required minimum distributions, or RMDs, from their tax-deferred retirement plans -- even though those dollars are essentially locked away in the annuity and they won't reap the benefits of the annuity until they are, say, 85 years old. (Required minimum distributions must start at age 70½.)
The proposed rule would allow those dollars to be excluded from RMD calculations, as long as the annuity met a variety of requirements (for instance, payouts start no later than age 85).
The other proposal concerns workers with traditional pension plans; they would start to see different options if the proposed rule is adopted.
Currently, when workers retire, they're often confronted with a question: Do you want your retirement savings as a lump sum or in the form of an annuity? They may have the option of taking a partial lump sum and annuitizing a portion of their money, but that "partial" option is often not very clear, and many consider their choice an either/or one.
Faced with losing control over the savings they've accumulated for years, most workers choose the lump sum.
"The proposed regulation changes a regulatory requirement to make it simpler for defined-benefit pension plans to offer combinations of lifetime income and a single-sum cash payment," the Treasury release said. "This is designed to encourage more retirees to consider partial annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs."
Two new regulations
Thursday's announcement also included two new rules, now in effect. One makes it easier for employers who offer both a 401k and a traditional pension plan to let retiring employees take an annuity from the pension plan, even if the pension is closed to new participants.
The other new regulation, again aimed at encouraging employers to offer annuities, clarifies the rules governing deferred annuities and spousal consent, to make it clear that if an employee buys a deferred annuity with benefits such that spousal consent is required (current rules exist to protect spouses), that consent is not required until the employee annuitizes the funds. In other words, the consent is not required until a final decision about the funds must be made, potentially years later.
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