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Proposed legislation could help encourage your clients to
consider rolling over 401 (k) plans into retirement annuities. The
legislation, Senate bill 2832, would amend the Employee Retirement
Income Security Act of 1974, to focus greater awareness on lifetime
income retirement planning.
Under the bill, sponsors of 401 (k) plans and other private defined
contribution plans would be required to show annually, on one pension
benefit statement, how the value of retirement accounts translates into
guaranteed monthly payments. The bill, introduced on Dec. 3, would
require calculation of payments, based on such factors as age at
retirement.
Currently, most private retirement plans only provide participants with
lump-sum values.
“Looking only at the lump-sum value of your retirement plans is a bit
like reading every-other page of a book…”says Frank Keating,
president of the American Council of Life Insurers. “How that lump sum
translates into regular income is the other, and equally important, half
of the retirement savings story. Workers should examine retirement
strategies and products that guarantee lifetime income.”
Sponsored by U.S. Senators Jeff Bingaman (D-NM), Johnny Isakson (R-GA)
and Herb Kohl (D-WI), the bill was referred to the Committee on Health,
Education, Labor and Pensions. However, at this writing, there was no
companion bill in the House of Representatives.
Might such a federal requirement jump-start plan sponsors into adding
variable annuities with guaranteed lifetime withdrawal benefits or
immediate annuities to their defined contribution plans? One thing is
certain: If adopted, the legislation would impact more than $3 trillion
in defined contribution plan assets, according to the Employee Benefit
Research Institute, Washington, D.C.
“I think this is a great idea and would be real wake-up call for
many,” says Peter Welsh, a Chicago-based employee benefit consultant.
“Receiving a lump sum or managing lump sum account balance at
retirement places a tremendous amount of responsibility on individuals
who up to that point have only been concerned with spending, not
saving.”
As it stands, lifetime income disclosure calculation would be based on
the joint and survivor immediate annuity calculations. This information
could be used in conjunction with the social security statement to piece
together a client’s retirement income security puzzle.
The act does not require that participants be offered annuities at
retirement or that they be defaulted into them. However, Jacob
Herschler, senior vice president of Prudential Financial’s annuity
business, believes that it could cause employees to see their 401(k)
accounts not as a lump sum, but rather the generation of a source of
lifetime income they will invest.
“This should generate more interest in 401 (k) rollovers into IRAs
with variable annuities that offer guaranteed lifetime withdrawal
benefits,” Herschler says. ”Advisors can talk to clients about
rollovers and guaranteed income protection when their retirement
accounts fall in value.”
Benefit consultant Welsh believes the act could lead to greater use of
immediate annuities.
“It is not a big leap to that at some point in the future,” he
predicts. “Employees will be annuitizing their 401 (k) accounts more
than taking lump sums.”
Welsh says the measure is expected to generate more interest in using
single premium immediate annuities than in variable annuities that pay a
guaranteed lifetime withdrawal benefit because the immediate annuity
provides more income. But variable annuities still may be popular with
retirees who want greater liquidity.
Noel Abkemeier, actuary at Milliman Inc., Williamsburg, VA, agrees.
Read the full story here.
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