The market's recent plunge likely frightened more
Americans into a willingness to consider putting at least
some of their 401(k) assets in a retirement-income product
at retirement. Now, Congress may give them a nudge to go
ahead with it.
Support for tax advantages for annuities, previously
proposed in 2005 by Rep. Earl Pomeroy (D-North Dakota),
seems low this year, given the government's other
current financial demands. However, several other ideas
appear to have potential traction, and they speak to the
logistical and psychological reasons that many see at the
heart of 401(k) participants' continued aversion to
retirement-income products—the overall inertia, concerns
about the complexity and cost of choosing an annuity on the
open market, the fear of losing money to unstable financial
institutions, and the impression that a series of small
payments made over time has less value than one big
lump-sum payment.
"As we bring more people into the system, we will
need to address the longevity risk," says David
Certner, AARP's Director of Legislative Policy in
Washington, pointing to the Obama Administration's
auto-IRA push. "Having a better-functioning annuities
market would be very helpful."
Three Possible Solutions
These three possibilities seem the most discussed
currently:
Auto-enrollment in annuities: Nonprofit public-policy
researcher The Brookings Institution has proposed a
"test drive" that would automatically enroll
defined contribution participants in an annuity for two
years after they retire. Congress would establish an
acceptable range of default balance put into the
annuity—say, 50% to 80%—and each employer could choose the
best percentage for its workforce, says William Gale, a
Brookings Vice President and Director of the Retirement
Security Project. Employees could opt out or change their
percentage, he suggests.
A government mandate to purchase annuities "would
be a step in the wrong direction," Gale stresses. An
annuity does not work best for everyone, he says, and, even
when it does work well, a bunch of variables mean no one
annuity setup is right for everyone. "It is very
important that these things remain voluntary," he
says. If people get the wrong annuity, he says, they
"have made a big, permanent mistake."
Gale also favors the government coming out with
QDIA-like guidelines for annuities, to ease employers'
worries about fiduciary issues. "I would like to see
that: 'You tell me what the acceptable situations are, and
I will pick one,'" he says. "We need a safe harbor
for payout options, like we have for investment
options."
From an employer perspective, sources agree,
auto-enrollment succeeds in giving many more participants
access to a retirement-income vehicle. With opt-out rates
low for automatic enrollment in 401(k) plans, "it is
not likely that they will opt out" of auto-enrollment
in an annuity, says Robyn Credico, Arlington,
Virginia-based National Director, Defined Contribution
Consulting, at Watson Wyatt Worldwide.
"Automatic enrollment seems to work, period," Certner
says, "so it would probably work for anything." In this
case, too, it likely would "harness the power of inertia,"
he says. AARP previously backed legislation from former
Illinois Sen. Carol Moseley Braun to require joint-survivor
annuities as an option in defined contribution plans, he
adds.