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.

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