With companies continuing to shift away from pensions toward 401(k)s, many CFOs no longer have to worry about a long stream of future obligations draining their corporate coffers. They may, however, find themselves with a new worry: retired employees draining their own coffers.
Among the first waves of 401(k) holders retiring, most are taking the lump sum of their savings and putting it into IRAs. That’s good news in that they’re still saving, says Betsy Dill, senior partner at Mercer. The bad news, though, is that “there’s a high probability they could outlive whatever money they’ve accumulated,” since “there’s not a good awareness of how to take that lump sum and create an income stream out of it.”
However much companies might want to help, though, the Obama Administration’s suggestion last January that annuities should be an option within 401(k) plans struck fear in the heart of some CFOs. Right now, only about 2% of employers offer such an option among investment choices, according to Hewitt data, in large part because the rest are daunted by the liability that seems to accompany it.
Annuities, in their basic form, offer a steady and guaranteed paycheck during retirement years in exchange for a lump sum of money up front. The problem that plan sponsors may face in offering annuities is with vetting the insurance companies that sell them. The big question: if an insurance company goes under 20 or 30 years after the investment is made, is a plan sponsor liable for continuing the payments?
A recent joint hearing by the Labor and Treasury departments on the topic — broadly known as “lifetime income” — should help plan sponsors breathe easier. After gathering input from various entities in the retirement industry, including insurance companies, 401(k) plan providers such as Fidelity and Vanguard, consultants, and a group representing plan sponsors, “it is clear that the government is not going to mandate” the inclusion of annuities in 401(k) plans, says Alan Vorchheimer, a principal in Buck Consultants’s retirement practice.
Vorchheimer believes the government is not even likely to mandate some suggested educational illustrations, such as what a person’s savings would look like as a stream of annuitized payments. Rather, he and others expect the DoL to make things easier for companies that offer 401(k)s.
“For any CFOs considering a solution [to how their employees draw down retirement savings], there’s the potential for new rules that will make it easier,” says Alison Borland, retirement outsourcing strategy leader at Hewitt. Those rules could include a safe harbor around annuity products that would clearly delineate that plan sponsors are not liable for any failures on an insurance company’s part to pay out.
Currently, the most involved a typical company will get in helping employees tap into retirement savings postemployment is to point them toward a number of rollover options, including IRAs and annuities. Dill says she sees more plan sponsors getting interested in “creating a menu of spend-down options,” possibly including basic annuities, more-complex products such as an annuity wrap based on a target-date fund, or structured payouts from a target-date fund designed to cover the lifetime of a retiree.
The main benefit of having an annuity offered within a plan is that companies with larger numbers of employees could potentially negotiate for lower fees, notes Borland. The approach would also make it easier for employees to purchase annuity assets over time rather than buying all at once.
However, consultants say that even if the government makes it easier for companies to offer annuities, there isn’t likely to be a stampede of employers or employees to them. “Employees are not asking for it at this point,” says Vorchheimer, in part because the financial crisis has squelched trust in the big insurance companies that offer annuity products.