Lifetime Annuities for the 401k

Lifetime annuities for participants in 401k and other employer pension plans became the subject of study by the U.S. Department of the Treasury, along with Labor in February 2010.

What Are Lifetime Annuities?

Pension contracts, usually purchased from an insurance company, that provide a member with an income for life.

Current Options

Typically, you get to do one of three things with your 401k when you leave your employer.

You may:

An IRA rollover from 401k
Leave your 401k with your former employer
Transfer your money to your new employer's plan

Most people choose the IRA rollover from 401k and invest their money in stocks, bonds, and mutual funds.

But none of these options addresses issue of retirement longevity and/or assure a guaranteed stream of income for life.

For that reason, the Feds, including the US Department of the Treasury, have taken up the idea that workers who leave their jobs be given the option to invest some or all of their 401k money into lifetime annuities that would provide income for life like a traditional defined benefits pension plan or Social Security. The option would help retirees make sure they won’t outlive their nest egg. It's an option that's often offered to workers in other countries.

U.S. Department of the Treasury Information Request

In February 2010, the U.S. Department of the Treasury, along with the Department of Labor, launched a review of the rules under the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code (Code) to determine whether, and, if so, how, the Agencies could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime annuities or other arrangements designed to provide a lifetime stream of income after retirement.

As part of the review, the US Department of the Treasury and the Department of Labor sponsored a request for information. The purpose of the request was to solicit views, suggestions, and comments from plan participants, plan service providers, members of the financial community, the general public, and employers and other plan sponsors on compelling issues such as lifetime annuities.

Lifetime Annuities

A specific issue of interest was that of lifetime annuities. The US Department of the Treasury wanted opinions about requiring employers to offer lifetime annuities as a rollover option to retiring workers. Would that be a good idea?

We "are soliciting public comments [to determine] what steps to take to enhance retirement security for workers in employer-sponsored retirement plans through lifetime annuities or other arrangements that provide a stream of income after retiring," said Labor and the US Department of the Treasury in a recent press release.

The Broader Range of Topics

The US Department of the Treasury, along with Labor, posted their full request for information on their Websites.

The following are examples from the broad range of topics about which Uncle Sam sought feedback in addition to lifetime annuities:

The advantages and disadvantages of distributing benefits as lifetime annuities both for workers and employers, and why lump-sum distributions are chosen more often than a lifetime income option.
The type of information participants need to make informed decisions in selecting the form of retirement income.
Disclosure of participants' retirement income in the form of account balances as well as in lifetime payment streams.
Developments in the marketplace that relate to lifetime annuities and other income options.

Topic: Fixing the Retirement System Subtopics: The American Retirement System • What Is Retirement Age? • Pension Retirement Plan Reform • Lifetime Annuities • 401k Annuities • 401k Annuities: A Proposal from TIAA-CREF• 401k Annuities: Popular Support • Cash Balance Accounts • White House Reform • Obama Retirement Reform • Social Security Statements as a Model • Models from Australia, New Zealand, and Canada • What the Public Wants • Multi-Employer Plans • Automatic 401k • Automatic IRA • Tom Harkin • Herb Kohl • Other Advocates of Pension Reform • Opposition to Reform