Americans are not good at predicting their own death.
In fact, data cited in a new Brookings Institution paper on the value of longevity annuities says that half of the people who think they won't live to see age 75 actually do. And a lot of them live much longer.
That's part of the reason why University of Maryland professor Katherine Abraham and Brookings fellow Benjamin Harris write in favor of improving the regulatory framework around longevity annuities to encourage more plan sponsors to include the option in 401(k) menus.
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Last summer, longevity annuities, which guarantee income later in retirement, received a boost from the Department of Treasury when regulators said the contracts can be included in 401(k) plans and are not subject to the required minimum distributions for other plan assets.
The paper from Brookings is calling on the DOL to do more. Specifically, the authors want safe harbor rules, designed to protect sponsors, reformed.
In their paper, they recall the failure of Executive Life in the early 1990s, which left many defined benefit plans that held annuities issued by the insurer at risk. Policymakers responded by placing strict fiduciary standards on sponsors with respect to how they choose insurance companies.
In 2008, the Department of Labor sought to clarify regulations for annuities in defined contribution plans, creating a safe harbor checklist that protects sponsors from liability.
But some of those requirements for safe harbor are unspecific, and unrealistic, and place so much analytical burden on employers that the employers ultimately are deterred from including longevity annuities in plan menus, according to the Brookings paper.
One provision, for example, says employers must conclude "at the time of selection that the annuity provider is financially able to make all future payments under the annuity contract."
"It is widely believed that, for many employers, the analytical burden combined with the threat of legal action in the event of being accused of a violation is a sufficient disincentive to prevent them from offering an annuity option," write Abraham and Harris.
The paper addresses other barriers to developing a stronger longevity annuity market, from educating consumers on the real risk of outliving their savings, to incentivizing insurance companies to develop more options.
The authors are clear that longevity annuities can help better prepare for adequate retirement planning, but not if the DOL doesn't address existing safe harbor rules.
"Ultimately, it seems unreasonable to ask plan sponsors, especially small employers, to independently verify the financial soundness of a life insurance company," they write.
"Clearly, the role of fiduciary is important and worth safeguarding, but a safe harbor that effectively prevents most retirement plan participants from having an annuity option goes too far."
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
