Bill would require showing savers' 401(k) balance as a fixed monthly annuity payment
May 17, 2011 8:00 AM
By Tim Grant Pittsburgh Post-Gazette
The total balance on a 401(k) statement is generally viewed as the most important number. But, as important as that is, it does not give employees a full picture of where they stand in their retirement planning.
A bill under consideration in Congress would require plan sponsors to include another number on 401(k) statements that could be even more critical in helping workers understand how their savings will last through retirement -- the annuity equivalent.
An annuity equivalent number is the guaranteed lifetime monthly income that an insurance company would pay the employee and the employee's spouse if the entire 401(k) balance were used to purchase a life annuity at the age of 65.
"Half of American households will lack sufficient retirement income to maintain their pre-retirement standard of living, but many are unaware of their vulnerability," said Sen. Jeff Bingaman, a Democrat from New Mexico and a co-sponsor of the bill. "Our bill will empower Americans to determine whether they are on a path to a secure retirement."
The Lifetime Income Disclosure Act would be a small step in helping retirement savers look at their 401(k) balances in terms of the monthly income it could potentially generate through a fixed annuity.
In the same way that Congress mandated annual Social Security statements in 1989, the monthly annuity equivalent would help workers see how much income they can expect to receive to meet monthly expenses during retirement.
The bipartisan bill, which is co-sponsored by Sen. Bingaman; Sen. Johnny Isakson, R-Ga.; and Sen. Herb Kohl, D-Wis., is still in its early stages in the Senate health, education, labor and pension committee. The next step will be a full committee vote later this year. The bill will then be eligible for consideration by the full Senate.
So far, the act is supported by many of the leading voices on retirement policy, including the AARP, the National Women's Chamber of Commerce and the American Society of Pension Professionals and Actuaries, the nation's leading association of retirement plan professionals.
"In general, New York Life thinks it's a good thing," said Paul Horrocks, vice president of the New York-based insurer. "But we feel very strongly the annuity number should be standardized.
"Two different people the same age with the same 401(k) balance should not get two different answers for how much annuity income they should expect to receive," he said.
If the legislation passes as is, the Department of Labor would be required to issue guidelines on how employers with 401(k) plans may calculate an annuity equivalent. As long as employers and service providers use the guidelines provided by the labor department, they would not be held liable if the estimates are not accurate.
Helping people figure out how much money they will have to live on when they retire has become more important since fewer companies offer traditional pensions. A growing number of workers are responsible for funding and managing their own retirement accounts, which has proven to be an overwhelming task for many.
Retirement investors tend to prefer simple solutions. Target date funds, which allow workers to choose a retirement year and let mutual fund managers automatically invest their money, have become popular among retirement investors in recent years because of their simplicity.
The Lifetime Income Disclosure Act could introduce the idea of annuities to an audience that previously might not have considered them, which could open the door for more investment capital flowing in that direction.
According to LIMRA, a global firm that provides research to insurance and financial services companies, sales of annuities have more than doubled in the past 10 years. Annuity providers sold $7.6 billion worth in 2010, compared with $3 billion in 2000.
The fixed annuity equivalent in the Senate bill should not be confused with variable annuities, which are a different.
Fixed annuities are guaranteed lifetime payments backed by the full faith and credit of the insurance company that sells them. Variable annuity funds are invested in assets with fluctuating rates of return, which means the lifetime monthly payout also will vary.
"I'm typically the guy who says more legislation is not a good thing," said Brian Dean, executive vice president of retirement plan services for CBIZ, an accounting and benefits consulting firm headquartered in Cleveland. "Here, I'm actually looking at what Congress is trying to do with lifetime income disclosure and I'm for anything that will make Americans better savers. This is a good thing."
Mr. Dean said more major providers are now offering annuity products within their 401(k) plans. While it can be a great way to help employees save for retirement, the biggest problem he sees is transportability between jobs.
"If you change employers, you are no longer putting money in the old employer's plan," he said. "You can work for a company for 15 years funding a lifetime income plan, and if you move to a new company, you can no longer fund that plan.
"That could be an issue because not every company will offer a lifetime annuity. The downside of annuities is they lock you up, and the fees are high. If you want guaranteed income, it will cost money. There are no free lunches."
With fixed annuities, the company pays the monthly benefit it promises, but typically the investor will pay more for an annuity than for an index fund or a mutual fund.
Not everyone thinks encouraging workers to get into annuities is a good idea.
Matthew Tuttle, CEO of Tuttle Wealth Management in Stamford, Conn., is not a fan. He said many companies offered annuities and their payouts varied depending on the company.
Just as he is suspicious of government figures for inflation and unemployment rates, he said he was also leery of the Department of Labor formula that will be used to calculate the estimated annuity payout in the proposed legislation.
"You've got to have a pool of money set aside to grow because annuities will not keep pace with inflation," Mr. Tuttle said. "If you live for a long time, you could be pretty much out of luck.
"Most people are better off with an IRA with a well-thought-out investment strategy and withdrawal rate."