Want some free marketing material for your annuities business? Look no further than the U.S. Government Accountability Office (GAO), which recently released a report touting annuities for their ability to provide sufficient retirement income in an increasingly uncertain environment.
The GAO recommends that retirees delay their receipt of Social Security Benefits and either draw down savings and purchase an annuity or select annuity options from their defined benefit (DB) plans instead of electing to receive their benefits in a lump sum.
According to the GAO, the shift from defined benefit pension plans to defined contribution (DC) plans like 401(k)s necessitates a heightened focus on annuities and other options for guaranteeing income during retirement. And even if workers are saving more for retirement through their DC plans, they are still at greater risk than employees with DB pensions.
“Although, retirement savings may be larger in the future as more workers have opportunities to save over longer periods through strategies such as automatic enrollment [in DC plans], many will likely continue to face little margin for error. Poor or imprudent investment decisions may mean the difference between a secure retirement and poverty.”
The GAO also notes most government resources encourage retirement savings without bringing enough attention to the problem of ensuring sufficient retirement income. It also notes that pension plans are not required to disclose to employees the risks of retirement and suggests that plan sponsors be required to notify participants of those risks.
Most retirees rely on Social Security and frequently do not pursue opportunities to generate additional retirement income, according to the report. “Taking Social Security benefits when they turned 62, many retirees born in 1943, for example, passed up increases of at least 33 percent in their monthly inflation-adjusted Social Security benefit levels available at full retirement age of 66. Most retirees who left jobs with a DB pension received or deferred lifetime benefits, but only 6 percent of those with a DC plan chose or purchased an annuity at retirement."
In support of its positive assessment of annuities, the report also recommends that the U.S. government adopt policies that encourage annuities.
Some options for encouraging the purchase of annuities include mandating DC plans to offer more annuities options and modifying tax law to exempt deeply deferred annuities from minimum distribution requirements (“deeply deferred annuities” are purchased at or near retirement and do not pay out until an advanced age, e.g. 80 or 85).
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See also The Law Professor's blog at AdvisorFYI.