4 December 2022

401(k) Not Likely to Offer a Longevity Annuity

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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.

Click here to access the full article on Reuters. 

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