Longevity risk, the risk
of outliving your retirement savings, is among retirees' biggest worries
these days. The Obama administration is trying to nudge employers to add a
special type of annuity to their investment menus that addresses that risk. But
employers are not keen on the idea so far.
The U.S. Treasury released rules
earlier this month aimed at encouraging 401(k) plans to offer "longevity
annuities" - a form of income annuity in which payouts start only after
you reach an advanced age, typically 85. Longevity annuities are a variation of
a broader annuity category called deferred income annuities (DIA). DIAs let
buyers pay an initial premium - or make a series of scheduled payments - and
set a date to start receiving income.
Longevity policies are a hard
sell because of the uncertainty of ever seeing payments. And interest in
annuities of any sort from 401(k) plan sponsors has been weak. The Treasury
rules aim to change that by addressing one problem with offering a DIA within
tax-advantaged plans: namely, the required minimum distribution rules (RMDs).
Participants in workplace plans - and individual retirement account owners -
must start taking RMDs at age 70 1/2. That directly conflicts with the design
of longevity annuities.
401(k) plans just aren’t all that
hot to add annuities - of any type. A survey of plans this year by Aon Hewitt,
the employee benefits consulting firm, found that just 8 percent offer annuity
options. Among those that don’t, 81 percent are unlikely to add them this year.
Employers cited worry about the fiduciary responsibility of picking annuity
options from the hundreds offered by insurance companies. Another key reason is
administrative complication should the plan decide to change record keepers, or
if employees change jobs.
Employees are showing interest in
the topic: A survey this year by the LIMRA Secure Retirement Institute found 80
percent would like their plans to offer retirement income options. The big
trend has been adding financial advice and managed account options, some of
which allow workers to shift their portfolios to income-oriented investments at
retirement, such as bonds and high-dividend stocks. Fifty-two
percent of workplace plans offered managed accounts last year, up from 29
percent in 2011.
Outside 401(k)s, the story is
different. Some forms of DIAs have seen sharp growth lately as more baby
boomers retire. DIA sales hit $2.2 billion in 2013, more than double the $1
billion pace set in 2012. Sales in the first quarter this year hit $620
billion, 55 percent ahead of the same period of 2013. Three-quarters of those
sales are inside IRAs since taking a distribution to buy an annuity triggers a
large, unwanted income tax liability. But the action - so far - has been
limited to DIAs that start payment by the time RMDs begin. The new Treasury
rules could accelerate growth as retirees roll over funds from 401(k)s to IRAs.
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