Feds' Proposals Support Annuities
February 13, 2012 by Eileen Ambrose
| By Eileen Ambrose, The Baltimore Sun |
| McClatchy-Tribune Information Services |
Feb. 07–Until recently, retirement
planning focused mostly on helping workers accumulate savings.
Now, the Treasury Department is tackling another aspect: making sure
retirees don’t run out of money.
The department last week proposed two regulations to make it easier for workers
to get annuities through their workplace plans. With an annuity, workers can
make a lump-sum payment to an insurance company and in exchange get an income
stream for life.
Outliving savings is a serious risk, and a fear of many retirees. The
department’s goals are laudable.
But annuities haven’t caught on with retirees. Annuities can be complex and
expensive, and there’s no guarantee that the insurance company will be around
once a retiree is ready to collect benefits. And complaints about hidden fees
and high commissions involving one type of annuity have turned many consumers
into skeptics. The Maryland Insurance Administration says it
receives more complaints about annuities than any other life insurance product.
If employers are going to be encouraged to offer annuities as an option — and
this can be highly beneficial — sufficient transparency and protections must
be in place so that workers can get a low-cost product they can understand.
It’s no secret that we are living longer and that many Americans don’t save
enough for retirement.
Nearly one-third of women reaching the age of 65 in 2007 — and about one in
five men — can expect to live to at least 90, according to the White House
Council of Economic Advisers. Elderly women run a higher risk of living
in poverty, the council says.
Given this situation, Treasury officials say they want to remove regulatory
barriers that have discouraged or prevented employers from offering an annuity
option to workers at retirement.
One proposed regulation would make it easier for employers with traditional
pensions to let workers split their benefit — taking part of it in cash and
the rest as a monthly paycheck for life.
Employers usually give workers a choice of one or the other. Experts say many
workers worried about being able to pay for unexpected expenses will choose the
cash — but then might not have the investing skills to make it last.
The other Treasury proposal would allow workers to use a portion of an
individual retirement account, 401(k) or similar plan to buy so-called
longevity insurance. This is a deferred annuity that workers purchase around
the time of retirement, though the benefits don’t kick in for, say, 20 years.
“It’s much easier to manage spending down your assets for 20 years, if you
know that you have income coming in at age 85,” says Jody Strakosch,
national director with MetLife,
which sells such annuities.
This type of annuity is far cheaper than others, too. The council says a
65-year-old buying an annuity that would immediately start paying $20,000
a year would have to pay $277,500 upfront. But the worker would
have to pay only about $35,200 at retirement for the same annual
benefit to begin at age 85.
Under the Treasury’s plan, workers would be able to buy an annuity for up to 25
percent of their account balance, not to exceed $100,000. The
annuity would be exempt from minimum distributions that retirees must make from
retirement accounts after turning 701/2.
This would appear to be a boon for the industry, but officials say that wasn’t
the aim.
“This initiative is not intended to favor any particular group or industry
— it’s intended simply to benefit the American worker and retiree,” says
J. Mark Iwry, senior advisor to the Treasury secretary. “It is very hard
for individuals to protect themselves against the risk of outliving their
savings in retirement.”
Industry representatives acknowledge annuities can be confusing and say there
must be greater education of employers and workers about the product. They note
that the annuities being encouraged by Treasury aren’t the type that have
gotten bad press.
“We are going to have to make our products simpler and easier to
understand,” says Tom Foster, a spokesman for the Hartford,
which offers longevity insurance.Karen Friedman, executive vice president of the Washington-based
Pension Rights Center, says this is an important first step to recognizing the
need to turn 401(k) savings into an income stream. Addressing this through
workplace plans, Friedman adds, means employers will have a duty to make sure
they choose good products for workers.
Friedman says her group will advise that these annuities be simple, transparent
and low-cost.
Some fee-only planners, who don’t earn commissions from selling products, are a
bit wary.Kirk Kinder, a Bel
Air planner, says his first reaction was to wonder if the Treasury
was responding to heavy lobbying by the annuity industry.
“I have seen so many shady practices with annuities,” Kinder says,
citing high costs as one issue.
Kinder says he rarely recommends annuities, and does so only for highly
risk-averse clients who no longer want to invest. In those cases, he says, he
sticks with low-cost annuities.
The Treasury proposals could very well be a solution to a serious problem. And
let’s hope that the industry will respond with easy-to-understand, low-cost
annuities that provide the security retirees need.
___
(c)2012 The Baltimore Sun
Visit The Baltimore Sun at www.baltimoresun.com
Distributed by MCT Information Services
|
Wordcount: |
875 |
