401(k) Plan Center

New rule on annuity options for retirement plans

New rule on annuity options for retirement plans

Recent rule allows participants to purchase annuities with a portion of their balances.


New Rule on Annuity Options for Retirement Plans




  • Recent rule allows participants to purchase deferred annuities with a portion of their balances.  To date, the only products on the market are high cost options.

  • We anticipate lower cost choices in the next couple of years as a result of this rule and believe it is best to see how this pans out in the market.


Lincoln-Douglas, Nixon-Kennedy, tastes great/less filling … history’s great debates have nothing on the controversy surrounding the inclusion of annuities in retirement plans. Detractors point to the needless cost of double tax-deferral, while supporters like the guarantees.


The ongoing argument is sure to heat up in light of a recent Treasury Department ruling. Implemented on July 1st, it allows employees to convert part of their IRA or 401(k) balances into a deferred income annuity (meaning longevity insurance). The rule states that retirement plan participants can use up to $125,000 or 25 percent of their IRA or 401(k)—whichever is less—to purchase the product.


Recognizing that Americans are living longer, and therefore spending significantly more time in retirement, the Treasury Department is seeking to help ensure we don’t run out of money before we run out of life. It’s a real problem; according to the Employee Benefit Research Institute's 2014 Retirement Confidence Survey, half of workers age 55 and older have less than $50,000 in savings. With most financial advisors recommending million dollar minimums to retire (or more), the shortfall is sufficiently grim.


Only about 20 percent of retirement plans currently offer annuities as an investment option, but the rule may increase that number.1


The decision of whether or not to use an annuity in this manner will of course depend on the individual’s situation. Estimated health care costs, market volatility, mortgage payments, lifestyle and life expectancy are just a few of the factors to consider. Additionally, many of the living benefits options that made variable annuities attractive, in particular, are no longer as prevalent in many products due to hedging and pricing mistakes revealed during the economic crisis.


Yet economists and financial experts highly recommend a guaranteed source of income in retirement, one not dependent on the vagaries of market performance. It allows for peace of mind and the option of considering more risk with other assets to achieve potentially higher returns. Annual investment returns average anywhere between 4% and 6%, but the figure doesn’t account for retirement income withdrawal plans that begin in market down-years. Known as sequence-of-return risk, a reduction in asset value due to poor stock market performance means a higher percentage of the portfolio is withdrawn. Not only is the risk of outliving one’s assets significantly increased, the assets are no longer there to take advantage of the ensuing recovery. Again, it’s something with which a deferred income annuity can help.


There’s no right answer to the question of whether or not to purchase an annuity, but with the Treasury Department’s new rule, the option is at least there. More options to help plan for retirement are never a bad thing, which is one thing on which both sides can agree.


1 "A New Option In Your Retirement Account: Longevity Insurance." Forbes.com. July 11, 2014.




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