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Annuities and the tug-of-war over retirement accounts

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There’s a tug-of-war going on over retirement income. Fewer employees have access to traditional defined benefit pension plans and that trend is likely to continue. On the one hand, workers miss the security of a pensions’ guaranteed income. The TIAA-CREF Lifetime Income Survey, findings of which were released in February 2015, found that 84 percent of respondents said having a guaranteed monthly lifetime income was important to them. Forty-eight percent believed that “having guaranteed income to cover living costs should be the primary goal for their retirement plan.”

That sounds like a problem in search of annuities for a solution. As expected, however, only a small number of those surveyed have purchased (14 percent) or plan to purchase (15 percent) an annuity. Sixty-one percent do not plan a purchase and 9 percent are undecided. 

Uncle Sam to the rescue?

That dichotomy concerns the government and economists, says Mark Warshawsky, Ph.D., a researcher with the Mercatus Center at George Mason University in Arlington, Virginia and author of “Retirement Income: Risks and Strategies.” The uncertainty of a retiree’s life expectancy is a major risk, he adds, and that makes retirement income a legitimate policy concern.  

Warshawsky points to several policy proposals that highlight the government’s concern and favorable attitude toward annuities. “Probably the most obvious and most immediate one is the Department of Labor (DOL) has an Advance Notice of Proposed Rulemaking to require plan sponsors to illustrate the income that can be produced in the future from a 401(k) account,” he says. “The Department of Labor in its proposal has put forward that that be done as if the account holder buys an immediate annuity.”

The Department of Treasury’s decision to allow deferred income annuities (DIAs or ALDAs, advanced life deferred annuities) is a “type of encouragement for partial annuitization,” he maintains. More broadly, there is much discussion of whether there should be a mandate for at least partial annuitization, Warshawsky adds.

Finally, he says, the DOL’s fiduciary proposal can be seen as potentially benefiting immediate annuities. If the evidence supports the beneficial role of immediate income annuities versus lump sum distributions, as Warshawsky’s research purports, fiduciary status would require advisors to consider immediate income annuities for their clients.  

A balanced approach

So, should the government require at least partial annuitization of retirement account balances? Warshawsky examines that issue in a June 2015 Mercatus working paper, “Government Policy on Distribution Methods for Assets in Individual Accounts for Retirees”. He compares converting retirement account balances to immediate, fixed payment life annuity with the 4 percent, inflation-adjusted managed withdrawal approach, also known as the Bengen rule. It’s an interesting analysis that provides an excellent review of the key issues involved with each approach.

His conclusion: government policy should not force annuitization. In some of the simulated scenarios, such as retirement at age 55, managed withdrawals are superior. As the retirement age gets pushed back, however, life annuities are a better solution. Still, the results are mixed and there are cases in which annuitization of any amount would be harmful to the retiree’s finances, he notes.

“So, that’s a reason not to be heavy handed,” he says. “The other reason is I think we need to be gradual in our approach to regulations and see what works. I think we need to give a good try and a good see with regards to these disclosure regulations, the illustration regulation, and see if that has an impact. So, for those reasons, I’m not willing to go whole hog and say you need mandates.”


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