Few workplace savings plans provide resources such as annuities to guarantee that savings will last throughout retirement, according to a recent white paper from TIAA.
This “guarantee gap,” it says, undermines the very purpose of the retirement savings plan system, which is to minimize the risk of both poverty among retirees and strain on the social safety net.
“Ensuring that American retirees have sufficient income to last throughout their retirement is among the most critical issues facing our economy,” TIAA’s president and chief executive Roger Ferguson said in a statement.
“For nearly 100 years, employees with 403(b) retirement plans have benefited from access to investments that generate guaranteed lifetime income. All American workers deserve to retire with the same level of financial security — and Washington can play a key role in getting there.”
The white paper notes that Americans today can expect to live 20 to 30 years in retirement. In some two-thirds of married couples who are 65 today, at least one spouse will live to age 90 and nearly two in five will live to 95.
Longer life expectancy, it says, increases “longevity risk,” the chance that retirees will outlive their savings — and most Americans underestimate their life expectancy.
Indeed, concern about longevity risk prompted the Internal Revenue Service to ease rules to make it easier for clients to protect against the risk.
According to the paper, the U.S. retirement savings system has many strengths, but also two major weaknesses in addition to the guarantee gap.
Not enough Americans have access to a workplace retirement plan, and even if they have access to a plan, many Americans are not saving enough.
Policymakers and other stakeholders are addressing the coverage and savings shortcomings, but have done little to bridge the guarantee gap.
The paper says the gap had its origins in tax law and pension policy changes over the past 25 years. These changes, it asserts, created substantial disincentives for employers to provide workers the opportunity to invest in options that guarantee income that lasts throughout retirement.
The media have not helped, running ads that make annuities sound like financial shenanigans forced on unsuspecting clients by predatory salespeople.
TIAA acknowledges that no single policy change will fix the guarantee gap, but insists that improvements are needed to broaden access to guaranteed income in retirement. It would start by offering in-plan annuities in retirement plans. TIAA offers in-plan annuities along with a number of other investment and insurance products.
Beyond that, it recommends six solutions for consideration by legislators and regulators to advance lifetime income’s role in retirement savings plans:
- Simplify the safe harbor for employers selecting an annuity provider
- Increase the portability of annuity contracts in order to simplify plan operations
- Broaden the qualified default investment alternative regulations to include annuities
- Provide plan participants with an annual lifetime income disclosure statement
- Give participants more access to flexible income distribution options
- Provide favorable tax treatment for annuity income in retirement
— Check out 7 Ways the New Tax Fight Could Hit Annuities on ThinkAdvisor.