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Retirement Planning > Retirement Investing

Lack of 401(k) Annuitization Portability Is Mean: Pension Policy Specialists

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Pension policy specialists have explained why you might care about “portability” — one of the little-discussed, complicated-sounding provisions in the major retirement bills now in play in Congress.

The explanation boils down to this: The current lack of portability could be extremely mean to clients who start out in a 401(k) plan with a lifetime benefits annuitization option.

(Related: Life Insurer Group Backs Federal Auto-Retirement Plan Requirement)

A team at the Georgetown University Center for Retirement Initiatives and a team at Willis Towers Watson have included the explanation in a look at the retirement income options available in 401(k) plans and other defined contribution retirement plans, such as 457 plans.

The teams prepared the review to support the idea that regulators and policymakers should do more to encourage retirement plan sponsors to offer annuitization options, or other features that a participant can use to convert account value into a lifetime stream of income.

About 26% of the sponsors that participated in a Cerulli Associates survey said they frequently offered retired or separated participants access to a qualified plan distributed annuity, according to a study cited by the policy specialists.

The plan participants in plans with recordkeepers that offer an annuitization are getting access to a valuable benefits, the policy specialists say.

Today, the policy specialists say, under the current rules, when an employer changes recordkeepers, the annuitization option could simply disappear.

“Without portability,” the policy specialists write, “a participant would lose the guaranteed benefit under his or her current contract. It would be liquidated (surrendered) as a result of the transfer to a new recordkeeping.”

The kinds of portability provisions in the retirement bills now in the headlines in Washington could keep a participant from losing a valuable guaranteed benefit simply because the plan sponsor changes recordkeepers, the policy specialists write.

“Plan sponsors should not feel beholden to one recordkeeper for fear that the value of lifetime income solution they have adopted will be lost if they change providers for service-, fee-, or business-related reasons,” the policy specialists write “Without a purely open-architecture approach to DC plan administration, portability continues to be an issue that hinders the broader adoption of guaranteed income solutions.”

One way to provide a portable annuitization option would be to have a company other than the recordkeeper keep track of data related to the income guarantee, the policy specialists write.


A copy of the Georgetown policy specialists’ analysis is available here.

— Read Sweeping Retirement Bill, Raising RMD Age, Unveiled by House Panelon ThinkAdvisor.

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© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.