Time to speak up for or against annuities

BOSTON — The federal government wants your opinion about your retirement plan. Yes, the Labor and the Treasury departments want to know whether you think requiring employers to offer lifetime annuities as a rollover option to retiring workers is a good idea.

Typically, you get to do one of three things with your 401(k) when you leave your employer. You can roll your money into an IRA, leave it behind at your employer or transfer it to your new employer's plan.

Most folks roll their 401(k) into an IRA and invest the money in stocks, bonds and mutual funds, none of which address the issue of longevity risk and none of which provide a guaranteed stream of income for life.

What's on the table is the notion that workers who leave their job be given the option to invest some or all of their 401(k) money into an annuity that would provide income for life, like a traditional defined benefit and Social Security.

Lawmakers, policymakers, academics and industry executives say adding annuities as an investment or rollover option is one way to help retirees make sure they don't outlive their nest egg. It's an option often offered to workers in other countries.

So what do Labor and Treasury want? According to the request for information (RFI), Uncle Sam wants your comments on a broad range of topics, but especially this:

• The advantages and disadvantages of distributing benefits as a lifetime stream of income both for workers and employers, and why lump-sum distributions are chosen more often than a lifetime-income option.

• The type of information participants need to make informed decisions in selecting the form of retirement income.

• Disclosure of participants' retirement income in the form of account balances as well as in lifetime-payment streams.

• Developments in the marketplace that relate to annuities and other lifetime-income options.

You likely have plenty to share with Uncle Sam about the above. But in case you need help getting your creative juices flowing, here's a snapshot of what some retirement experts say.

The government's efforts are misplaced, according to Kerry Pechter, editor of the "Retirement Income Journal" and author of "Annuities for Dummies."

Those saving and investing for retirement don't lack for product. "There are already lots of perfectly practicable income solutions available to people," Pechter said.

Problem is money

"That's not the problem. The problem is that most people cannot afford them. Most people don't accumulate enough through defined-contribution plans to fund annuities that will sustain them for 25 years of leisure," he said.

"The 401(k) system is a very rickety foundation on which to try to build a reliable lifetime-income scheme. The middle class needs more money, not more tools."

Unfortunately, he said, each segment of the financial and academic community will probably use the Labor and Treasury departments' invitation to speak up a chance to plead its own case and tout its own solution.

"The government appears to be walking naively into the crossfire between the securities and the insurance industries," said Pechter, who noted this exercise might be all for naught. "I expect the sum of all the suggestions to be zero."

Others have a different take. The departments' request is on the right track, said Moshe Milevsky, author of the just-published "Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life" and an associate professor in finance at York University in Canada.

But it's very important for the Labor Department to appreciate the following items, Milevsky said.

From the get-go, it should be acknowledged the economic value of annuities comes from "mortality credits" that accrue to the survivors at the expense of those who are deceased, Milevsky said.

Litmus test

"Any proposal to mandate, give preference or safe harbor to annuities should make sure to distinguish between the name (or) label 'annuity,' and what the annuity is intended to achieve," he said. "There should be a litmus test that an annuity should pass before it is given favorable treatment in the eyes of the Labor Department. Just because a securities lawyer or insurance regulator calls it an annuity doesn't mean an economist does."

It's important to understand that some — although not all — people view their 401(k) as part of their financial legacy, as opposed to a nest egg, Milevsky said.

"For consumers who value bequests, annuities are not optimal nor do they belong in the optimal portfolio," he said. "We must make sure that policy accounts for different strengths of bequest motives, as it accounts for different risk attitudes."

There should be a variety of products offered along the annuity spectrum, as opposed to a garden-variety, single-premium immediate annuity or SPIA.

"When the dust settles, let's make sure not to bless only one model, or one color, one type," Milevsky said.

As has been proposed in legislation, 401(k) plans ought to report two numbers on every single 401(k) statement, said Milevsky.

"No. 1 is the current market value of the account, and the second is the income this would provide — starting at age 67 — if the entire amount were irreversibly annuitized today," he said. "This will give people a very accurate indication of how close or far they are to achieving their retirement income goals."

Meanwhile, insurance and mutual-fund executives see the addition of lifetime annuities as a rollover and as an investment option inside the 401(k) as a necessary arrow in the quiver.

"Plan sponsors are looking for guidance around how to prudently evaluate retirement-income options," said (John) Jamie Kalamarides, a vice president at Prudential Retirement.

Prudential is among those firms already offering annuities to 401(k) participants.

And at a recent conference, Robert L. Reynolds, CEO of Putnam Investments, urged lawmakers to launch a comprehensive effort to strengthen all of America's retirement-savings systems, including a plan for building in lifetime-income options.

Reynolds called for the following:

• The creation of an optional national insurance charter and a new regulatory body empowered to approve, or deny approval to, qualified lifetime-income products including annuity and non-annuity products.

• The creation of a new lifetime-income security fund, comparable to the Federal Deposit Insurance Corp. in banking, to back up lifetime-income guarantees from insurers whether offered "in-plan" or as choices people make when rolling over from a workplace savings plan to individual accounts.

• The requirement that all workplace savings-plan providers offer such options to all employees, but leave employees free to choose or reject lifetime-income options.

• Strong tax incentives to employees who invest in insured lifetime-income products, since converting life savings into lifelong income is even more challenging than accumulating a nest egg.

• Strong legal protection to employers who offer automatic enrollment, as well as access to advice, guidance and lifetime-income-guarantee products in their savings plans.