Categorized | Finance & Work

Government gets an earful on 401(k) proposal

By David Pitt


What happens when the government considers tinkering with retirement accounts and asks for citizen input?

It gets plenty.

Government officials began seeking comments in February on a proposal to add an annuity option to retirement plans. Such an option would potentially turn a portion of a retiree’s savings over to an insurance company in exchange for a monthly check.

Annuities reduce the chance retirees will outlive their savings. In addition, the risk of losing money if the stock market drops is minimized.

However, retirees lose the upside potential of the stock market, and the flexibility to spread out their investment portfolio.

The departments of Labor and Treasury requested input on the annuity issue as they pondered solutions to a serious problem that plagues current savings plans — retirees running out of money.

The government expected the usual responses from insurance and investment industry groups, but not hundreds of letters and e-mail from workers and retirees.


By the May 3 deadline, 700 responses were received, far more than usual.

“The (proposal) was not even out on the street for an hour and we started getting these comments,” said Phyllis Borzi, the assistant secretary of Labor in charge of employee benefits. “I don’t think anybody here has ever had anything quite like this.”

By comparison, a recent request for comments on retirement account investment advice rules attracted just 24 letters.

The Center for Retirement Research at Boston College estimated in an October study that nearly half of U.S. households will not have enough income to maintain a preretirement standard of living, even if they work to age 65.

The problem is getting worse as companies continue to eliminate pensions and workers must save on their own through a 401(k) plan. Most don’t save enough.

In addition, the stock market downturn in late 2008 and early 2009 reduced retirement accounts by an average of 30 percent. Although market returns have helped many regain lost ground, workers within a few years of retirement won’t have time to recoup their losses.

The Employee Benefit Research Institute says nearly half of the oldest baby boomers — those born between 1948 and 1954 — who earn an average of nearly $41,000 per year, are at risk of not having enough money to meet basic expenses and medical costs not covered by insurance.

The government’s proposal under consideration would change federal rules to allow a portion of 401(k) and Individual Retirement Accounts to be used to buy an annuity that would provide retirees a guaranteed monthly income for life.

Although there are many types of annuities, they are investment products sold by insurance companies. The buyer turns over a sum of money in exchange for receiving a monthly check either for life or a specified number of years.

Few existing 401(k) plans offer an annuity option. A 2009 Hewitt Associates survey said just 7 percent of employers include such an option inside the 401(k) plan and 2 percent plan to add the option this year.

About 14 percent of employers offer annuities as the form of payment for final distribution, when a worker leaves the company to retire.

It may take some persuading to get investors to buy into the annuity idea. Many oppose it because they’d rather be in control of how they spend the pile of money they’ve accumulated and they don’t like the risk of losing it if they die early.

Significant education will also be needed to explain the complex annuity contracts.

Workers with a 401(k) often transfer their savings into an IRA after they leave their job or retire, investing the money in a mix of stocks and bonds. Most retirees withdraw enough to supplement Social Security and hope market conditions allow them to earn enough to make the money last. With many retirees living into their 80s, however, accounts dwindle and it’s becoming more common to outlive one’s nest egg.

Borzi said the plan was never to force anyone to buy an annuity, but many comment letters indicate that’s how many people interpreted the proposal.

The government’s request for information asked for responses to the questions: Should some form of lifetime income distribution option be required for defined contribution plans? If so, should that option be the default distribution option, and should it apply to the entire account balance?

Many saw that as an indication the government is considering requiring some or all of an account to be converted into an annuity.

“I strongly oppose the idea of the government taking away my hard-earned savings in exchange for an annuity,” wrote Robert Newman, of Wentzville, Mo.

Some said they will pull money from retirement accounts, even if they have to pay a penalty, to get it out of the government’s reach if annuities are required.

“I am appalled and insulted that you would consider yourself in a better position than I to know what is best for me in regard to my own money,” wrote Steven Gruber, of Syosset, N.Y.

Borzi said the intent is to consider whether employers should be required to offer annuities or other alternatives for workers and not as a requirement for them to buy anything.

“This is all about giving people choices,” she said.

The 401(k) industry likely will not add an annuity option unless the government requires it, said Nancy Jones, a spokeswoman for Allianz Life Insurance Co., which sells annuities.

When you’ve got an industry that’s pretty well entrenched, having some sort of requirement will promote an annuity option in a much stronger way than just telling employers, “we encourage you to do this,” Jones said.

Industry groups and individual companies generally support the idea of choice but oppose mandates.

New York Life Insurance Co., a leading annuities provider, said the government should encourage annuitization, perhaps through a tax incentive, but not require it.

Forcing annuities on people could create a backlash, said Tom Kmak, CEO and founder of Fiduciary Benchmarks, a company that provides fee data to retirement plan providers.

“If you mandate that everybody puts their money into an annuity, what happens to the guy who dies at 69 and his widow is now not going to get $230,000 because the annuity was purchased for a 20-year period and he lived for two (years)?”

The volume of letters and range of issues raised may lead to public hearings or round-table discussions to further explore some of the concerns, Borzi said.

It’s too early in the process to determine what changes the Labor Department might propose and whether Treasury officials revise tax rules to encourage annuities.

“If the comments turn out that people are saying to us the market is handling this, go away, we can,” Borzi said.

The government could end up doing nothing, she said. — AP

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