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Annuities Now Permitted to Be Unleashed in Retirement Plans

by Elizabeth D. Festa

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So, you can have your annuities and eat them (or have them feed you for life), too, now. 

The life insurance industry got a boon today when the Obama Administration endorsed the use of annuities in retirement plans, but also was affected in a final rule of the U.S. Department of Labor regarding expanded compensation disclosures for retirement plans, but got a needed delay in implementation.

The dual measures from the Administration, under the U.S. Treasury, the IRS, and the White House’s Council of Economic Advisors (CEA), are aimed at expanding transparency in the 401(k) plan marketplace while also  broadening  the availability of retirement plan options. The DOL disclosure measures are aimed at transparency. 

One industry official declared the announcement to be excellent news. “The annuity is getting the attention it deserves,” he said.

The announcement comes at a time when insurers are considering new products like the controversial contingent deferred annuities, and other modern designs to craft longevity products they think will be popular and fill a strong need for retirement income.

The administrative package issued today would provide regulatory guidance encouraging employers that sponsor both defined contribution (DC) and defined Benefit (DB) plan participants the option of using their DC payouts to purchase an annuity from the employer’s DB plan. Treasury also proposed changes to regulatory requirements to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment to encourage more retirees to consider partial annuities. 

Annuities allow retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.

Treasury is also proposing removing a regulatory impediment to purchasing a deferred “longevity” annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy.  

“We agree with the Departments’ conclusion that lifetime income options can provide greater certainty in retirement and minimize the risk of retirees outliving their retirement savings.  And we are encouraged by the guidance package released today that includes steps to encourage partial annuity options, remove barriers to purchasing annuities, and clarify rules that apply when plan sponsors offer lifetime income options under their plans,” stated Insured Retirement Institute CEO Cathy Weatherford.

In relaxing the Application of Required Minimum Distribution (RMD) rules to accommodate longevity annuities in DC plans, the Administration said it realized that the rules have had the practical effect of impeding the offering of longevity annuities in plans and traditional IRAs. 

“One of the improvements offered today will exempt longevity annuities (up to a specified limit) from RMD rules to enhance the ability of 401(k) plans and IRAs to offer individuals the option to use an “affordable” portion of their account balance to purchase a longevity annuity,” stated the Council. 

These rules were put in place to ensure that retirement plans are used to provide retirement security rather than avoid estate taxes on bequests to heirs.

Treasury is also is clarifying rules for plan rollovers to purchase annuities and spousal protection rules for 401(k) deferred annuities. In two revenue rulings issued today, Treasury clarified the rules that apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer’s defined benefit pension plan. Treasury also said that employers can offer their employees the option to use 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens.  

More on this topic

Both of these rulings would facilitate the availability of flexible options for employees so that they can better use their 401(k) savings to achieve financial security in retirement, Treasury said.

CEA has prepared a detailed report describing the significance of today’s actions, which can be accessed here. 

“Today’s Treasury and IRS actions will facilitate the creation of new lifetime income choices to help Americans manage their hard-earned savings in retirement. … While we know average life expectancies, it is impossible for individuals to know how long they will live. As a result, many retirees risk outliving their savings or unnecessarily limiting their spending in retirement because of the fear of outliving their savings,” the CEO  stated on the White House and treasury blogs today. 

Disclosure of Compensation Amped Up for 401(k) Plans 
Meanwhile, the DOL’s Employee Benefits Security Administration issued disclosure rule that will provide employers sponsoring pension and 401(k) plans with information about the administrative and investment costs associated with providing such plans to their workers.

Now, service providers will have a three-month extension in the effective date of this rule – service providers must be in compliance by July 1, 2012, for new and existing contracts or arrangements, DOL stated.

This information includes the direct and indirect compensation received by the service provider, its affiliates, and/or subcontractors; the sources for indirect compensation and services to which such compensation relates; and details on recordkeeping and investment-related fees. 

The added disclosures are intended to reduce the time and cost for fiduciaries to obtain compensation information needed to fulfill their fiduciary duties, discourage harmful conflicts of interest, improve decision-making by fiduciaries about plan services, enhance value for plan participants, and increase the DOL’s ability to redress abuses committed by service providers. 

But insurers mostly focused on the future of annuity offerings they can now offer across a wider platform.

“Treasury has advanced a major plan to address our nation’s retirement income crisis. Millions of American workers are not prepared for the challenge of managing assets through a lengthy retirement. They face a real risk of outliving their assets, possibly facing economic hardship at one of the most vulnerable stages of their lives. Helping today’s workers achieve lifetime retirement income can help avert a crisis in the years ahead, when much of the baby boom generation will leave the workforce,” stated American Council of Life Insurers President and CEO Dirk Kempthorne.

Overall annuity sales were expected to surpass $150 million in 2011, according to the Insured Retirement Institute, due in large part to surging demand for variable annuities , sales of which hit $8.8 billion in the third quarter of 2011, the highest level seen by IRI in 14 quarters. Year-to-date VA sales for 2011 were 18 percent higher than in 2010, totaling $118.3 billion.

Third-quarter sales of indexed annuities also surpassed those of the year-ago quarter, according to Chicago-based Beacon Research. The estimated $9 billion in indexed annuity sales during the third quarter marked an increase of 0.4% from the same period the year prior and 7% from the second quarter.

However, indexed annuity sales were down 1% for the first three quarters of the year, as were overall sales of all types of fixed annuities, including indexed and traditional fixed products. For more on that, see the Hot-or-Not List, by David Port of Senior Market Advisor.