Officials discuss difficulties of putting annuities into 401(k) plans

Public officials turned to employee benefits executives for guidance on how best to incorporate annuity products into retirement plans.

J. Mark Iwry, senior adviser to Treasury Secretary Timothy Geithner, and Michael L. Davis, deputy assistant secretary for the Labor Department's Employee Benefits Security Administration, on Monday spoke at MetLife Inc.'s sixth annual benefits symposium in Washington. During the panel they hosted, they discussed some key legislative changes that will effect retirement planning, and asked audience members for input on integrating annuities into defined-contribution plans.

“The translation from the [retirement] account balance to income stream is something people aren't good at,” Mr. Iwry said. “People are unrealistic about how long they'll live.”

The use of annuities in retirement plans is just one of the concepts public officials have been kicking around. Currently, the Labor and Treasury departments have issued a request for public comments on incorporating lifetime income options into employers' plans. The deadline for submissions is May 3.

Indicators suggest employees want an annuity option in their defined-contribution plan: MetLife's study of employee benefits trends, which surveyed about 1,500 employers and 1,300 employees, showed that 44% of workers would like an annuity option as part of their 401(k), 403(b) or 457 plan. But only 10% of employers say they're “very interested” in providing that choice.

“Employers tell us the Pension Protection Act of 2006 and the safe harbor regulations aren't well-understood by the plan sponsor community, so when they're thinking of fiduciary duty in regards to choosing an annuity provider, they're unsure of their role and the liability,” said Bill Raczko, senior vice president of marketing for U.S. business at MetLife. Counter-party risk and a focus on health care benefits are also holding back employers from considering annuities in their retirement plans.

And though many workers say they want an annuity option, Mr. Iwry noted that in situations when workers can choose between a lump sum and an annuitization of their defined-benefit plan, they tend to take the lump sum.

Still, benefits executives in the audience suggested that the way the annuity option is framed might be key. One executive said that her company used a TIAA-CREF plan with an annuity.

“We put so much emphasis on the individual responsibility, and it's shocking how reliant people are on their means,” the executive said. “We don't give them the framework to make good decisions; we make it complex.”

Mr. Iwry noted that, in that situation, the annuity is already part of the benefits picture, but in many other situations employees often feel like they face an all-or-nothing situation: Take the lump sum or take distributions of the benefit.

Another audience member noted that it was helpful to show participants what the retirement benefit in his company's cash balance plan looked like as an annuity. “What I want to communicate is, ‘There is your bond. Now think of converting that cash balance to an annuity,'” the executive said.

Mr. Iwry asked the audience to weigh whether it would be helpful to accommodate a deferred annuity — specifically, longevity insurance — under the required minimum distribution rules. This way, participants can begin receiving income either when they hit life expectancy or at an advanced age as a way to protect against outliving assets.

“It's a way to protect yourself against the tail risk of longevity,” Mr. Iwry said. “An annuity that starts at that age — even if it doesn't pay anything until you get there — demands less of your account balance now.”

Darla Mercado is a reporter at InvestmentNews, a sister publication of Pensions & Investments.