Under current law, it has been relatively difficult for 401(k) plan sponsors to use annuities as a default investment.

Recent legislation has been proposed to make it easier to do so. The legislation would require that plan participants receive notice and details about the annuity investment and have an option to opt out of it.

We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether annuities should be the default investment for 401(k) plans.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Annuities are an incredibly valuable option to protect against the risk of outliving retirement savings. Many taxpayers simply do not have the financial skills to know how to handle the decumulation phase of retirement income planning. Even if they've saved responsibly for retirement, they may not have any real sense of how much money they should be taking out of their retirement plan to prevent running out of money later in retirement. Annuities take the guesswork out of the 401(k)-account withdrawal process.

Bloink: We can't definitively say that annuitizing 401(k) dollars is the best plan for any group of taxpayers, so no, annuities should not be the default investment for retirement savers. Yes, it can be difficult to understand how much should be withdrawn from a 401(k), and running out of savings during retirement is always a very real concern. Some middle-income retirees may be attracted to annuities, sure. Higher-income taxpayers have sufficient resources so that they aren't worried about running out of funds during retirement.

Byrnes: We can look to market conditions today to support the value of annuities in 401(k)s. Annuities also protect against market downturns. Many retirees are looking at significantly reduced 401(k) balances. With annuity investments, this risk is simply taken off the table — because the investor has purchased a guaranteed stream of income that will last as long as they live regardless of how the markets perform during their retirement years.

Bloink: Locking up a significant chunk of retirement dollars in an annuity also overlooks one key consideration: All families will run into emergencies where they need access to funds. That does not change during retirement. Locking up retirement dollars in an annuity can lead to a situation where lower-income retirees aren't able to access their needed funds to cover costs.

Byrnes: While higher-income taxpayers have the resources and access to top-quality advice they need — meaning it's very unlikely that they'll ever run out of retirement dollars — we should be focused on the lower-income taxpayers who simply don't have those resources and are at risk of outliving their savings. Lower income taxpayers with 401(k) account balances can benefit from a built-in annuity strategy that will make it impossible for them to run out of retirement savings in the first place.

Bloink: There's nothing wrong with offering annuities as an option within a 401(k), but we can't say that it would be the best option for most retirement savers — remembering that when we're talking about a default option, many never take steps to proactively change the default. Annuities are incredibly complex financial products, and there is no one-size-fits-all approach when it comes to determining which annuity product will best suit a group of investors' needs.

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