At the beginning of February, the Department of Labor and the Treasury Department issued a request for information (RFI) on “Lifetime Income Options for Participants and Beneficiaries in Retirement Plans.” Rising concern over the move away from defined benefit plans to defined contribution plans, with a resulting lack of guaranteed income in retirement years to retirees, and the increasing reliance of those retirees on lump sum distributions–also resulting in a lack of sufficient funds to last throughout retirement–gave rise to the request, along with “efforts to promote retirement security for the American public.”
Two GAO reports, issued in 2007 and 2009, as well as a series of ERISA Advisory Council reports, raised concerns about a variety of issues faced by retirees.
These issues played a large part in the DOL/Treasury RFI. Through a series of 24 questions that sought to discover, among other queries, which lifetime income options, if any, are currently offered to retirees, why so few take advantage of them rather than lump sums (“the vast majority” choose lump sums), and how a lifetime income option might be incorporated into plans to protect the future financial well-being of retirees, the two Departments asked for input from plan providers and participants, employers and other plan sponsors, members of the financial community, and the public.
Nationwide’s Answer: 401KIncome
One response came from Nationwide in the form of a proposal called 401KIncome, undwer which annuities would be incorporated into 401(k) plans to provide an element of guaranteed income in a vehicle that otherwise offers little predictability and requires substantial financial decision-making skills on the part of the participant.
401KIncome, as laid out in Nationwide’s proposal, makes a number of recommendations. One of these is to improve employer participation in matching funds by urging the offering of a tax credit, rather than a tax deduction, for any employer contribution “used to purchase a guaranteed income stream in the form of a fixed or longevity annuity. . . .” It points out that a credit will be more beneficial than a deduction to smaller companies, which are taxed at lower rates.
Nationwide suggests various other approaches, including ways that annuities could be incorporated into 401(k) plans. The “guaranteed income stream” being purchased by employer contributions combines “private and government assurances that the guaranteed income will be backed by several layers of protection.” The proposal also recommends including a fiduciary safe harbor for the employer who chooses to add the option, and separate accounts for fixed assets.
Employers would need to contribute 2% to 3% for the plan to be considered nondiscriminatory, and while employees would retain control and direction over their own contributions, they would not be able to withdraw, direct, or take a loan against the company contribution. The fact that employees would not be able to access employer contributions, says Nationwide, would reduce plan “leakage,” money lost for retirement through loans or early withdrawals.
Currently “leakage” is a substantial problem, as is job-hopping, at which time many people simply cash in their plans. But under Nationwide’s proposal, that would not be an option for the employer contribution, which would remain safely tucked away for retirement.
Also in the proposal: The annuity provider would continue to administer the annuity portion of an employee’s 401(k) after separation or employer termination of the plan, and employees “would elect when and what form of lifetime income stream is generated in retirement.” There would be a default annuitization if no selection is made that would take into account the employee’s age and account balance.
A Nationwide spokesperson explained further: “A deferred income annuity does not have an accumulation value that increases based on market performance or interest rate credits. This portion of the plan would be purchasing pieces of income at the income purchase rates being offered at that time. Similar to how purchase rates are calculated for immediate income annuities, these rates will be set by the insurer and will vary depending on a variety of factors, including the current interest rate environment, the participant’s age, and contribution amounts. The payout amount upon retirement would be based on the total income purchased throughout the accumulation or deferral period, as well as the payout option selected.
“Nationwide would like for this benefit to be portable, so if an employee separates from service we would issue an individual annuity contract with the same benefits as the group plan but setup like an IRA.” This would allow employees to take the benefit with them as they change employers, without having to roll it over or cash it in.
Marlene Y. Satter is a freelance business writer who can be reached at [email protected].