From 401(k) to annuity
February 6, 2012 by N/A
Published Feb 5, 2012
Published Sunday February 5, 2012
The New York Times
It is one of the biggest conundrums of an aging society: Americans have salted away $11 trillion in retirement plans, yet millions still risk running out of money in old age.
Last week, the government said it had some new tools to deal with the problem. The Treasury issued several new regulations intended to make it easier, and maybe cheaper,
for middle-class people in retirement to transfer the money they accumulated in
their 401(k)s into an annuity that would guarantee monthly payments until they
die.
“Having the ability to choose from expanded options will help retirees and their families
achieve both greater value and security,” said Treasury Secretary Timothy
Geithner.
The Labor Department also said it had completed rules to let workers learn about the fees
various financial firms charge for helping to run 401(k) plans. Labor officials
said they thought employers could negotiate better terms if the details were
more easily available.
The risk of outliving one’s assets has moved front and center in recent years, as companies
have frozen or ended their traditional, defined-benefit pension plans and
replaced them with 401(k) plans. Traditional pension plans offer what is, in
fact, an annuity, a stream of guaranteed payments from retirement to death. But
fewer and fewer employers want to be running an annuity business on the side.
Insurance companies, on the other hand, are eager to wade into what they consider a big
and attractive market of graying Americans with IRA and 401(k) balances and
little idea of what to do with them. But they have held back, in part, because
of tax rules, which Treasury is easing.
One of the changes proposed last week would make it easier for employers to work with
annuity providers, so that workers can learn about their annuity options at
work, rather than having to go to a financial planner or broker.
“I’m trying not to jump up and down in my office, actually,” said Jody Strakosch,
national director of annuities for MetLife, who was asked about the new rules
while she was reading the 47-page tome from Treasury.
She said MetLife had had suitable annuity contracts available since 2004, but had been selling them mostly to the retail market and not to employers who offer retirement
savings plans.
J. Mark Iwry, an official at the Treasury Department, said the department hoped in particular to foster a workplace market for “longevity insurance,” something much
discussed in policy circles but that employers rarely make available to workers
when they retire.
Longevity insurance consists of an annuity whose stream of payments does not start until the retiree is well into retirement — say, 80 or 85 years old. That is the point
where policymakers think many will need the money, because they will have
exhausted their savings or developed costly health problems. The insurance
would kick in and supplement Social Security. Like Social Security, the
longevity insurance payments would keep coming every month until the retiree’s
death. But because the policy would pay nothing in the first 15 to 20 years of
a person’s retirement, it would cost much less than a conventional annuity.
A white paper by the Council of Economic Advisers estimated, for example, that a 65-year-old would have to pay $277,500 for a $20,000-a-year annuity that started
immediately, but only $35,200 for one that started at age 85.
With a price so much lower than a conventional annuity, employees would be able to buy
longevity insurance to cover their riskiest years with just a portion of their
401(k) account balance.
Most employers that offer annuities give retiring workers an either-or choice: the whole
balance as a big check, or the whole thing to buy an annuity. Tax rules make it
complicated to calculate the values if the amount is split, so those rules are
being relaxed.
