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.
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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.