It is beginning to look like the Pension Protection Act will become law, in one form or another. It also is beginning to look like the act will permit employers to provide pre-retirement “financial counseling” without worrying about the potential liability that could otherwise exist.
For quite some time, the federal government has encouraged employers to provide their retiring employees with pre-retirement financial counseling, but few employers have been willing to make the process meaningful.
Two reasons account for this. First, most employers have not believed their human relations personnel were competent enough to provide adequate financial counseling. Second, they did not want to bring outside counselors in to provide the counseling for fear that, if employees implemented the financial counseling and lost money in the process, the employers might be held liable.
The first reason still exists for employers not wanting to try to develop the inside expertise to provide investment counseling for retiring employees. However, the Pension Protection Act will end the second reason and also should provide an opportunity to solve other critical issues for retiring employees.
The life insurance industry has an obligation to grasp this opportunity. It should offer programs to employers that will help employees understand not only what constitutes an effective investment process for retirement but also the critical issue of longevity planning. The provisions of the new act need to give latitude for meaningful counseling in both areas.
Unfortunately, the Pension Protection Act emphasizes only the investment process.
Apparently, the technical experts advising Congress on pre-retirement financial counseling believe that providing information about subjects like diversification and asset allocation will enable employees to resolve all employee financial problems for retirement.
However, even the best investment counseling that is limited to subjects such as diversification and asset allocation cannot alone help the average American successfully plan for retirement. Retirees need to understand the risks of outliving their funds–something seriously lacking right now–and they need to have alternatives to pure investment strategies to hedge against such risks.
Obviously, the only sure method to provide against outliving retirement assets is through the use of a life contingency annuity issued by a legal reserve life insurance company. Annuities are particularly important in this era of the seemingly inevitable elimination of true “pensions” in the form of defined benefit pension plans. Therefore, it becomes critical for retirees to provide their own pensions through the use of life contingency annuities.
Yet, how can retirees find out about the importance of life contingency planning unless the pre-retirement counseling session includes information about annuities as well as pure investment techniques? Annuities should be involved in pre-retirement processes in two ways, as shown in the box.
Regarding the second point, an employer offering annuities as a part of the pre-retirement counseling process would enable retirees to obtain the protection afforded by annuities against outliving funds available for retirement. Meantime, the low-cost products involved can take advantage of the employer’s contact with employees to make the whole process of annuitization more efficient and easier to understand.
Moreover, the use of professional advisors in the form of trained retirement planners provided by insurers and insurance producer groups can resolve concerns employers may have about developing internal expertise.
Once the final law and any regulations are known, the industry can determine how far to go in offering employer-sponsored annuities. For now, the life insurance industry should become involved in helping ensure that annuities are included in the entire employer-sponsored pre-retirement counseling process.
The changes that will be brought about by the Pension Protection Act will have a profound effect on the entire retirement process. They will afford the life insurance industry a unique opportunity to change the way in which it sells retirement products.
We have argued in the past for the life insurance industry to get employers involved in the retirement business. Now, there exists the perfect method to do so. It is incumbent on all elements of the life insurance industry–insurers, agents and trade associations–to push for routine inclusion of counseling on annuities and lifetime financial planning in pre-retirement counseling programs.
Only by inclusion of such information can retirees truly protect themselves against outliving their retirement assets in a time frame that is consistent with the retirement process. Employers should now, with the advent of the limits on liability contained in the Pension Protection Act, be able to provide employees with employer-sponsored annuities–products that will enable a generation of Americans to retire with the security they rightfully expect.