Retirement Income:Lasting Forever?
And fiduciary concerns loom large. Plan sponsors have worked for the past five years to simplify their plans’ investment options, says adviser Paul Escobar, managing partner at Somerset Financial Partners in Boston. “Now Treasury is saying that they should put one of the most complicated financial instruments in their plan,” he says. “If they do that, they may be held personally liable for the use of one of the most complicated financial products that we have for individuals.” He does not think sponsors feel more secure about facilitating out-of-plan access to retirement-income products but instead believes that employers would be better to focus on increasing participation and making plans user-friendly.
In order for sponsors to feel comfortable, Sandler says, it likely would take a safe harbor for selecting retirement-income products; a safe harbor to guide and protect sponsors in selecting annuities “is a whole separate issue,” Levine says. “That is a Department of Labor discussion.”
For now, sponsors feel torn, Levine says. They want to help improve retirement security but face other issues. “There is great pressure on plan fiduciaries to control the cost of the plan. And annuities have added costs, because you are paying to guarantee income,” he says. “Some sponsors feel a little push-and-pull on that.”
Escobar points to another, very basic problem. Most Americans do not have enough money saved for retirement, and those without much savings do not have enough to make annuitization worthwhile, he says. The current, multiyear economic slump will only exacerbate that problem, he believes. “The new Treasury regs are nice, but they completely miss the mark for the average American.”
In addition, sponsors cannot really select a single retirement-income product that works best for all participants, Escobar says. One retiring participant might focus particularly on long-term care; a second might want to take the market volatility out of his or her portfolio and have some form of guarantee; and a third might prioritize tax sheltering. “If people with enough money when they leave a company need to annuitize, they should analyze their specific situation and find specific insurance products that meet their need,” he says. These products “are better shopped individually,” he says.
But that may mean paying more, many say. “The public perception of retail annuities is that they are very expensive,” Escobar says. “Can there be very expensive annuities? Yes. But some are very cheap. It depends what someone is looking for. The market is very broad and very deep.”