The most consistent comment is a concern over why DOL EBSA is promoting a 100 percent annuitization model over other illustration approaches, including systematic withdrawal methods already embedded in the retirement counseling processes of many large plans, leading providers and professional advisors.

As retirement industry titan Vanguard observed in its comments: "The Department (DOL) should not elevate complete annuitization of account balances above other approaches, as such annuity illustrations do not reflect plan options or participant preferences and are likely to mislead."

Of course, the vast majority of DC plan assets are invested in stocks and bonds, not annuities. And as even the most supportive commenter, the National Association for Fixed Annuities said, "A consumer should not be misled into believing that a blended portfolio of stocks and bonds, which do not have the income guarantees provided by fixed annuities, can be expected to produce the return that would be provided by a fixed annuity. In short, it does not seem at all appropriate to use annuity longevity risk pooling unless the consumer is buying a fixed annuity."

In short: The financial industry has told DOL EBSA to go back to the drawing board and get real. But what if this increasingly activist federal agency persists in putting required annuitized illustrations into a formal rule proposal? This should tell the industry there is a bigger picture at work behind the scenes of Washington policymaking.

From Poland to Universal IRAs 

Like many other countries, the U.S. faces a challenge in developing a long-term pool of buyers for its sovereign debt (Treasuries). In September, Poland nationalized its privately held pension plan assets to create more sovereign borrowing capacity. For several years, Spain has been using an increasing portion of its Social Security Reserve Fund, the backing for its largest public defined benefit (DB) plans, to purchase its own sovereign debt. Now, 97 percent of the Reserve Fund's assets reportedly are invested in Spain's equivalent of Treasuries. 

In the U.S., the largest retirement asset pools are not private DB plans but rather DC plans ($5.3 trillion) and IRAs ($5.7 trillion). Also, the U.S. Government has never tried hard to promote Treasuries to DC plan and IRA participants. As a result, less than 5 percent of this $11 trillion pool is estimated to be allocated to Treasuries, directly or indirectly through target date and hybrid funds. In comparison, the Federal Reserve now owns about $2.1 trillion of Treasuries, with an additional $45 billion being added per month under QE3. 

If the Fed is to taper QE over time, who will step in to buy massive amounts of Treasuries? There are several clues that the future answer could well be 401(k) and IRA participants, through government- guaranteed retirement income annuities. Let's review them:

• One new and surprising proposal in the 2014 Obama Administration budget would put a dollar cap on accumulations (a "maximum permitted allocation") in all types of corporate and government retirement plans (DC and DB). As an interesting twist, the current cap would be based on the dollar amount required to purchase a joint and 100 percent survivor life annuity of $205,000 per year starting at age 62, using a blend of U.S. Treasuries as a discount rate. The annual dollar cap would be lower for young plan participants than for older, and it would actually fall (for everyone) if Treasury rates increase.

• For the second year, the latest Obama budget proposal (FY 2014) included the concept of a "universal IRA." Although this concept aims mainly at filling a gap in retirement plan access for employees of small companies, it has often been linked with the idea of expanding government-sponsored guaranteed retirement income accounts.

• Although miniscule amounts of IRA and 401(k) plan participants currently choose to invest in retirement income annuities, the idea could have some appeal for younger baby boomers and women.

• Most 401(k)s and many IRAs are heavily invested in mutual funds, and mutual fund investors are free to invest as they choose, including outside the U.S. Since the start of 2007, the Investment Company Institute reports that $600 billion has flowed out of domestic equity mutual funds, while $250 billion has flowed into international equity funds. As plan investors gain increased access to international bond funds, more fixed income flows could move outside the U.S., too.

• One new concept, just starting to capture consumers' attention, is the "contingent deferred annuity (CDA)." This is an insurance company wrapper covering a separate investment account, insuring it against longevity risk. The CDA also is described as a guaranteed living withdrawal benefit unbundled from a variable annuity. If the wrapped investment account fails to sustain a stated withdrawal rate over the insured's life expectancy, the CDA guarantees to provide it. One problem with CDAs so far has been the heavy reserve requirements. Another problem is lack of consumer knowledge about the concept. Both problems could be solved if the U.S. Government were to support retirement accounts backed by CDAs and at least partially invested in Treasuries.

• In two states, California and Connecticut, legislation has been proposed to evaluate adoption of state-sponsored cash-balance pension plans for private workers. AARP has stated that it supports Connecticut's pursuit of a state-assisted savings program, while the American Council of Life Insurers opposes it as government intrusion.
• On Sept. 14, the U.S. Departments of Treasury and Labor held a joint hearing on the topic of lifetime income options in individual account plans. One financial professional, Kevin Hanney, spoke at the hearing, advocating: 1) A new type of self-amortizing, inflation-adjusted Treasury bond designed for retirement income (an "A-TIP"); 2) Opening a window to the Treasury Direct platform in "every IRA and DC plan in the country"; and 3) A direct-to-the-consumer offering of Treasury-sponsored IRAs.
  Josh Shapiro, representing the National Coordinating Committee for Multiemployer Plans, pointed out the adverse selection pricing problems in DC plans, when participants individually decide to annuitize plan balances. "Basically, they (insurance companies) realized that someone who's just had four hear attacks doesn't buy an annuity," Shapiro said. However, he also observed that "if a large number of defined contribution plans began to require mandatory annuitization, this would address several of these pricing issues automatically." Later, he was asked to clarify "mandatory annuitization." He replied: "In an ideal – super ideal world I would say it could be a government requirement.
  "We would support a requirement that all defined contribution plans offer basic lifetime income option as an optional form of benefit distribution from the plan," Rebecca Davis, coordinator of the Pension Rights Center's Women's Pension Project, testified.
  The disparity in retirement income security between U.S. women and men, and the annuity's potential to reduce that gap, has become an important theme in this debate. Government-mandated gender-neutral annuity pricing would work to the advantage of women, because their longevity penalizes income payouts under gender-based risk pricing.
  If you put the Shapiro and Davis comments together, the upshot is: If the U.S. government were to require retirement annuities, everyone could get better pricing than they can in today's private market, especially women.

Why Policymakers May Like the Idea

To summarize, let's review four key benefits that the U.S. Government could seek to achieve by one day requiring plan participants to allocate part of plan contributions to individual-account guaranteed retirement income annuities: 

1. Create a new source of buy-and-hold demand for U.S. Treasuries and perhaps other domestic securities, while reducing the flood of U.S. retirement plan assets moving abroad. 
2. Increase retirees' income safety nets and longevity protection, while gradually whittling back Social Security benefits to keep the system solvent long-term.
3. Reduce U.S. retirees' exposure to economic/market cycles and investment market variability. 
4. Support the U.S. life insurance industry by drawing upon its expertise in insuring against longevity risk, while eliminating the adverse selection and gender-based annuity risk-pricing obstacles. 

It's hard to argue that the combination of these four benefits will not look attractive to some D.C. policymakers, especially at Treasury, DOL and the Federal Reserve. On the other hand, the financial industry's negative critique of DOL EBSA's lifetime income illustration reveals many practical problems in moving DC plans (and perhaps IRAs also) toward a combination of more federal government control and guaranteed retirement income. 

The emphasis on annuitized illustrations caught the financial services industry off guard. It's still puzzling to many why DOL EBSA has advocated this illustration method over others. However, it starts to make sense if you accept the fact that the U.S. Government may be looking at a bigger picture than illustrations. The mandatory annuity concept accomplishes the four goals listed above. The current regime – in which participants can choose their own investments, shun Treasuries, diversify globally, withdraw as much money as they wish at retirement, and only annuitize if they are candidates to live beyond age 100 – falls far short. 

The next step is DOL EBSA's take. Let's watch closely where this idea goes.