Do annuities have a place in group retirement plans? There’s a lot of commentary before the Department of Labor about how to handle it if they do, and some companies are going ahead and offering annuities in 401(k) plans already.
So far there doesn’t seem to be much demand from plan participants, but clearly insurers are pushing hard to get their piece of the trillions now invested in 401(k) plans. Up until now, the fiduciary responsibility regulations of 401(k) plan sponsors have more or less kept insurers out of this market. That’s why they are so interested right now in getting a fair harbor provisions straightened out so, for example, plan sponsors won’t be held liable if an insurer offering an annuity in their plan goes out of business.
Mutual fund companies, which have ruled the roost in terms of managing 401(k) assets, are not so happy about the annuity option. They want to keep the money invested in their funds directly.
For bank brokers interested in managing the money that rolls over from the 401(k)s, it’s a little confusing whether this is a good or bad thing. If that money gets locked up in annuities offered by insurance companies, they won’t get to manage it. However, some bank advisors will have another chance to have conversations with their clients about annuities.
All in all, it’s probably a good thing for plan participants to have more choices, says Kerry Pechter, editor of the Retirement Income Journal. “There’s nothing wrong with giving people more choices,” he says. However, “from an industry standpoint I dread the confusion it’s going to cause.” That is, a whole raft of new costs will have to go into any new regulations and materials need to educate plan participants about the annuity option.
One of the benefits of such an idea—and the initial impulse behind the government’s interest in annuities, Pechter says—is reminding people that defined contribution plans were set up in the first place to encourage people to create retirement income, not to simply create a tax-free savings account. “People have come to look at 401(k) plans as savings to spend when they switch jobs,” says Pechter. “The tax deferral is there to create retirement income. The Administration is interested in getting government subsidies to perform their intended role. They see 401(k) tax deferral as government subsidy that is not getting adequate bang for its buck.”
Likewise people have come to see the required minimum distribution that kicks in at age 72 ½ as a kind of clawback or punitive requirement, Pechter says. But the original intent of defined contribution plans was to provide people with retirement income… Food for thought.