ERISA Advisory Council explores how annuities can enhance 401(k)s
At a 3-day meeting, retirement experts encouraged the Council, which advises the DOL, to recommend that qualified default investment alternatives (QDIAs) become more prevalent in defined contribution plans.
During a 3-day meeting of the ERISA Advisory Council, experts explored the possibility of making lifetime income options, which SECURE 2.0 encourages employers to include in their retirement plans, more prevalent as qualified default investment alternatives (QDIAs) in 401(k) plans.
Established by the Employee Retirement Income Security Act, the ERISA Advisory Council advises the Secretary of Labor and submits recommendations regarding the secretary’s functions under ERISA.
Defined contribution plan participants might be defaulted into a product in which approximately 10% of their plan balance at age 65 – “not your entire nest egg” – is used to purchase a deferred annuity that does not begin to pay until they are ages 80-85, said Olivia Mitchell, executive director of the Pension Research Council at the Wharton School of the University of Pennsylvania, at the ERISA meeting.
This default annuity is a one-size-fits-all approach, she said. A more tailored approach would be more expensive and “employers might not have the time and money to do that much analysis,” said Mitchell, co-author of “Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account.”
In her research, “we show that most people would be better off if they had access to deferred income annuities in their 401(k) accounts that allowed them to finance consumption while deferring claiming benefits,” she said.
Defined contributions plans are very good at accumulating assets, but “not very good at getting the money out,” said Michael Finke, professor of wealth management at the American College of Financial Services. An annuity, however, provides them with regular income that is more easily budgeted, said Finke, co-author of “Guaranteed Income: A License to Spend, published by the Retirement Income Institute.”
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The council needs to explore additional disclosures that could help explain annuities to participants, since “people don’t really understand what they are,” said Finke.