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Retirement Income: Republicans Lash Out; GAO, ASPPA Weigh In

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Congressional Republicans today stepped into the battle between life insurers and mutual fund companies over the proper vehicle investors should use to invest retirement savings.

The U.S. Treasury Department and the U.S. Labor Department set the stage for the confrontation in February, when they issued a request for information about strategies for helping workers convert savings from 401(k)plans and other defined contribution retirement plans into a guaranteed stream of lifetime income.

House Ways and Means Committee Republicans contend that a proposed use of “Guaranteed Retirement Accounts” or “annuitization’ of 401(k) accounts,” as recommended by the insurance industry, constitutes an Obama administration initiative to impose “radical changes to workers’ individual savings plans.”

Insurance trade groups and companies say in comment letters that annuitization would be a good way to ensure retiree access to guaranteed income for life.

The Investment Company Institute, Washington, and its mutual fund company members are arguing that defined contribution plans that use mutual funds rather than annuities “are proving to be highly effective in helping Americans save for retirement and particularly well-suited for today’s mobile work force.”

“The government should not mandate or incentivize particular retirement income products,” the ICI says in its comment letter. “Government policy should recognize that both annuity and non-annuity approaches to lifetime income are valid.”

House Republicans say the administration’s guaranteed income proposal could “undermine individual retirement savings plans” and “could make it more difficult and costly for employers to offer these voluntary plans, ultimately resulting in fewer Americans being able to save for retirement.”

“At a time when Democrats’ thirst for control over Americans’ lives seems to know no bounds, retirement savings are poised to be the next victim of federal overreach,” says Rep. John Kline, R-Minn., the highest ranking Republican Ways and Means member. “Proposals to make 401(k) savings plans less valuable for workers and more cumbersome for employers would take us in exactly the wrong direction.”

Frank Keating, president of the American Council of Life Insurers, Washington, is defending the retirement income RFI.

“It’s clear that the Labor and Treasury departments want to learn how the private sector, including life insurers, can help American workers secure a lifetime income stream from their retirement savings,” Keating says. “One of the key points ACLI made in its filing is that workers should have an option to annuitize at least a portion of savings. We believe that they would greatly benefit from knowing how their retirement savings translates into monthly income.”

The ACLI held a press conference to unveil the results of a retirement income survey it commissioned.

About 91% of the survey participants said they would like their employers to illustrate how much their savings would create per month for life, and 90% of the participants said they would like their employer to offer an option to use some of their savings to produce a guaranteed monthly income for life.

Meanwhile, in related news, the U.S. Government Accountability Office and the American Society of Pension Professionals & Actuaries, Arlington, Va., have come out with comments on retirement income issues.

GAO: Retirement Income Decisions May Prove Challenging

Retirees — even retirees who have substantial savings — may be facing “challenging” retirement income decisions, say GAO researchers.

The GAO researchers make the observation in a written response to an inquiry from Sen. Herbert Kohl, D.-Wis., chairman of the Special Committee on Aging.

Kohl’s committee has asked the GAO to examine 1) options that retirees have for drawing on financial assets to replace preretirement income and options retirees choose, and 2) how pensions, annuities and other retirement savings vehicles are regulated.

Retirees with savings largely rely on investment income or draw down their assets as needed to replace pre-retirement income, but many retirees lack substantial retirement savings, according to the GAO researchers.

Furthermore, American workers face a large variety of available investment options, the researchers note. These options are governed by a multiple laws, regulations, and agencies, they say, with the result that the retirement income decisions they must make “may prove challenging even for the minority of workers with significant retirement savings.”

For workers with small account balances of $100,000 or less, “the stakes are far greater,” the researchers continue. “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, 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, which highlights the need for improving financial literacy.”

In one section of the letter, the GAO researchers discuss annuities as one of the types of assets that retirees currently hold. The researchers point out how annuities are subject to different regulations. For instance, they note that annuities are regulated either exclusively under state law or under both state laws and federal law, “depending on the features of the particular annuity and whether it is marketed as an investment.”

They also note that Section 3(a)(8) of the Securities Act of 1933 exempts certain annuities from the provisions of the Securities Act, but they add that indexed annuities may or may not qualify under the Section 3(a)(8) exemption. Therefore, indexed annuities “may be regulated by state law and the federal securities laws, depending on the degree to which the insurer is assuming the investment risk vis-?-vis the purchaser and the manner in which the annuity is marketed,” the researchers say.

Click here for the GAO retirement income letter.

- Linda Koco

ASPPA Calls For Robust Debate On Lifetime Income Options

The American Society of Pension Professionals & Actuaries, Arlington, Va., is calling for “robust debate” on lifetime income options for participants and beneficiaries in retirement plans.

ASPPA is also calling for balance in the suggested alternatives, says Craig P. Hoffman, general counsel of ASPPA.

His comments accompany ASPPA’s written response to the retirement income RFI issued by the Labor Department and the Treasury Department.

The RFI is “an important first step toward the goal of providing greater retirement security for all Americans,” Hoffman says, adding that ASPPA “whole heartedly” supports the joint initiative.

“However, it is important to strike a balance between the efforts to encourage more thoughtful consideration of distribution alternatives with the cost and complexity the additional options may entail,” Hoffman says.

One challenge in this area is “reversing the inertia of the typical lump sum distribution process while integrating new lifetime options into a plan’s distribution menu,” Hoffman says. Effecting change “will require innovative products and greater flexibility from regulators and providers,” he says.

Another challenge involves educating participants on the inherent uncertainties associated with trying to choose the product that would best meet their needs, he says.

- Linda Koco

The ASPPA retirement income comment is available here