Our government is interested in promoting retirement security for American workers. In its recent Request for Information, the Treasury and Department of Labor solicited answers to 39 questions about "lifetime income options" from the financial community and the general public. As I mentioned in my most recent blog, it sure did get an earful from all these parties, with several hundred comments. Some members of the public said, in essence, "Don't mess with my retirement money!"
Lifetime income options can mean a number of things, but many people interpret the term to mean "annuities," since annuities come with guaranteed income for life.
I asked two members of the financial industry to share their opposing views with Bankrate's readers about including annuities in company retirement plans, and they graciously agreed to participate.
The insurance industry perspective
Neil McKay, chief actuary at Allianz Life Insurance Company of North America, says that over the next decade, 76 million Americans will be retiring, and they're going to have to have money to sustain themselves for 20 to 30 years.
In his words:
"These Americans can no longer rely on Social Security and employer pensions to act as the safety net for their retirement plans. This was made clear during the recent financial crisis, as the instability of individual retirement plans exposed consumers to a 40 percent market downturn -- a level of risk that few people can afford to bear.
"Current 401(k) plans are set up for the accumulation phase of retirement and fail to address the income phase, which determines the lifestyle the retiree can afford. An annuity is the only long-term investment option that provides guaranteed income for life, and offers retirees the flexibility to plan for expenses, including inflation or rising health care costs. The ability for insurance companies to pool risk means annuities are designed for stability, which is greatly needed in every retirement portfolio."
OK, that sounded like a commercial for annuities, and in effect that's what it is. The problem with annuities is that you pretty much have to surrender a big lump sum in exchange for a fixed income, and you generally lose access to that lump sum.
The fund industry perspective
Steve Utkus, head of Vanguard's Center for Retirement Research, says there's not enough demand for lifetime income solutions within retirement plans to warrant a big change in policy.
In his words:
"Most participants leave their employer plan once they have terminated their employment, and prefer to manage their savings independently and in coordination with other assets and income through IRAs. We believe they will continue to want to roll over their plan savings to an IRA at retirement.
"In turn, sponsors are reluctant to add in-plan services for departing employees and, in the case of guaranteed options like annuities, are concerned about the fiduciary selection process for insurance carriers, the illiquidity of the contracts once they are added to a plan, portability for the plan and the participant, and likely low utilization of such options by participants. For these reasons, Vanguard would question any policy rationale that mandates any specific in-plan retirement income strategy such as a traditional income annuity."
I would be remiss if I did not point out that the fund industry is not in the business of providing annuities, but it does offer IRA rollover products and other types of income solutions that come with no guarantees.
What do you think? Do you want annuity options in your 401(k) plan? Share your thoughts.