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A report by
the Hamilton Project at the not-for-profit Brookings Institute proposes that a substantial portion of 401(k) assets be automatically defaulted into a two-year trial income product when retirees take distributions from their plan. After the two-year period, unless the retirees affirmatively choose otherwise, a predetermined portion of their 401(k) savings would be defaulted into a permanent annuity providing a lifetime income stream.
As outlined in the discussion paper
Increasing Annuitization in 401(k) Plans with Automatic Trial Income, the idea behind the trial period is to ease participants' fears and promote greater understanding about annuitization before requiring a permanent commitment to an annuity.
"Retirees are living longer, but they don't know how much longer," which increases the risk that they will outlive their retirement savings, said Lena Walker, co-author of the report and research director for the
Retirement Security Project (a joint effort by Georgetown University's Public Policy Institute and the Brookings Institution), at a press conference held at the Brookings Institute on June 5, 2008.
Lump Sum or Annuitize?
"There are many reasons why the "lump sum vs. annuitization" debate is heavily tilted away from annuitization," added report co-author J. Mark Iwry, a senior fellow at the Brookings Institute and managing director of the Retirement Security Project. These, he said, include the "wealth illusion" through which participants perceive that a sizeable retirement nest egg has greater value than guaranteed monthly payments for life.
Iwry and Walker also noted that government regulations and annuity products themselves need to further evolve to better meet the needs of participants who roll over a portion of their 401(k) savings at retirement. Challenges include keeping annuity fees reasonable, especially for added "bells and whistles" that reduce risk, at a cost. For instance, inflation-adjusted annuity payments, and a guaranteed minimum death benefit for beneficiaries, are available with some annuity products, but the administrative costs passed on to participants can significantly reduce the monthly payments they'll receive.
Role for Plan Sponsors
401(k) plan sponsors can play a constructive role here, Walker noted. By keeping annuity options within the 401(k) plan itself, they can negotiate lower group rates for products with a guaranteed lifetime income stream. And by providing retiring participants with a platform of pre-selected and vetted annuity options, much like the pre-selected fund options available through the 401(k) plan for active participants, they can help retirees to better navigate into an appropriate annuity.
And then, of course, there is the novel idea of a two-year trial period that lets new retirees get comfortable with the whole idea.
Stephen Miller is manager of SHRM Online's Benefits Discpline.
The 401(k) Annuity Rollover Option at Ericsson,
SHRM Online Benefits Discipline, June 2008
AddingAnnuitiesCalled 'NextFrontier' in
SHRM Online Benefits Discipline, August 2007
Employees Make Smarter
SHRM Online Benefits Discipline, December 2005
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