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Annuitization Push May Favor Insurers Over Agents

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The employers that sponsor retirement plans often have different goals than the participants do, but policymakers in Washington may be converging on the idea that workers should get their financial advice through their employer plans, rather than through independent advisors they have located and hired themselves.

Staffers at the U.S. Government Accountability Office reflect the growing emphasis on employer-provided advisors, rather than advisors workers have hired, in sections on retirement asset annuitization in the big new GAO report on U.S. retirement security programs.

(Related: GAO: Overhaul Entire US Retirement System)

The GAO team based the report partly on the results of discussions with a panel of 15 retirement experts that gathered in November 2016. The panel included representatives from consumer organizations, universities, government agencies, and big asset managers, such as State Street Global Advisors, but it included no workers, and no one identified as an independent financial professional, or as a client of an independent financial professional.

The GAO team found that many 401(k) plans lack an annuitization option that can help retiring workers convert plan assets into a lifetime stream of income. Buying a lifetime income annuity is one way for retirees to guarantee access to a lifetime income stream, on top of what Social Security and an employer-sponsored defined benefit pension plan might provide, the team suggests.

The GAO team writes that one panelist told it that buying an annuity “on the retail market can be expensive and complicated.”

The GAO team acknowledges in a discussion of traditional defined benefit pension plans that relying on an employer to do a good job of managing a defined benefit pension plan can also lead to challenges.

At a defined benefit plan, “annuity benefits are dependent on the continued financial health of the plan and its sponsor,” the GAO team writes. “If a participant’s former employer encounters financial difficulties and fails to adequately fund the plan, the benefits could be at risk of being reduced, despite the protection of the [Pension Benefit Guaranty Corp.].”

But the GAO team goes on to describe a panelist’s proposal for encouraging employers to set up pooled annuity purchasing arrangements for employees.

Members of the retirement expert panel “mentioned the potential value of encouraging employers to adopt some type of pooled-risk annuity option for their retirees,” the GAO team writes.

Today, “it is expensive and risky for people to purchase annuities on their own with their [defined contribution] account balances,” a panelist told the GAO team.

A pooled-risk arrangement could help individuals share the cost of choosing an annuity, the panelist said.

The GAO team also talks about several other retirement savings ideas that could reduce the role of independent advisors, such as a proposal to attach a government-sponsored individual account to Social Security.

“Another panelist described a way of bolstering the retirement system by transferring savings from [individual retirement accounts] into Social Security,” the GAO team writes. “According to the panelist, such an approach would also allow individuals to annuitize and efficiently pool risk across a larger group.”

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