The U.S. Senate's Special Committee on Aging listened to rigorous testimony last week, debating the suitability of lifetime income products within defined contribution retirement plans like 401(k)s.
"There has been a trend away from sponsorship of defined benefit plans and a dramatic increase in the offering of defined contribution plans such as 401(k) plans, shifting a number of risks for retirement security on to the shoulders of American workers," Assistant Secretary of Labor of the Employee Benefits Security Administration Phyllis Borzi said in her testimony before the committee. "This trend, combined with increasing life expectancies, significantly increases the risk that retirees will outlive their retirement income."
The trend toward defined contribution plans, which provide a retirement benefit based on contributions and investment returns, has dramatically shifted the risk from employers to workers, Borzi continued, since workers do not receive a promised benefit or assurances as to the adequacy of their account balance.
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The committee's Chairman Sen. Herb Kohl, D-Wis., remained focused on annuity products and their viability to provide lifetime income options at a reasonable cost and with adequate consumer protections. According to a committee statement, Kohl said that while annuities may be the right fit for some retirees, "they can also be highly complex and, in the retail market, they have often been associated with aggressive sales tactics."
The same day as the committee's retirement income hearing, the American Benefits Council voiced its support of lifetime income products, but reinforced the need to educate participants on the availability and appropriate use of lifetime income products.
"Although many lifetime income options are often available in plans such as lifetime annuities, guaranteed minimum withdrawal products, systematic withdrawals, longevity insurance, employees generally do not select these options when retiring," said Lynn Dudley, senior vice president, policy, of the American Benefits Council.
"Several reasons underlie the participants' choices including lack of familiarity with the various products and uncertainty as to whether they will tie up all of their retirement assets. Many companies would like to provide more information and access to lifetime products but are limited by the potential for fiduciary liability."
Senator Kohl has sent a letter to the Government Accountability Office, requesting a review of how current regulatory structures ensure that institutions that sell annuities will be able to meet the financial commitments they entail, and the types of state guarantee funds that exist to protect purchasers of annuities, including how they are structured, how they are monitored, and the circumstances under which they have been used to compensate owners of annuities.
"The good news is that the post-retirement period is getting more attention resulting in more products from which to choose and a greater effort to address concerns of participants. Hopefully, policymakers will address plan sponsors' fiduciary liability concerns as well. However, simply because this is a developing area any legislation or guidance on this issue needs to be flexible and encourage new product innovations that will serve participants' post-retirement needs," Dudley said.
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