Until recently, retirement planning focused mostly on helping workers accumulate savings.
Now, the Treasury Department is tackling another aspect: making sure retirees don't run out of money.
The department last week proposed two regulations to make it easier for workers to get annuities through their workplace plans. With an annuity, workers can make a lump-sum payment to an insurance company and in exchange get an income stream for life.
Outliving savings is a serious risk, and a fear of many retirees. The department's goals are laudable.
But annuities haven't caught on with retirees. Annuities can be complex and expensive, and there's no guarantee that the insurance company will be around once a retiree is ready to collect benefits. And complaints about hidden fees and high commissions involving one type of annuity have turned many consumers into skeptics. The Maryland Insurance Administration says it receives more complaints about annuities than any other life insurance product.
If employers are going to be encouraged to offer annuities as an option — and this can be highly beneficial — sufficient transparency and protections must be in place so that workers can get a low-cost product they can understand.
It's no secret that we are living longer and that many Americans don't save enough for retirement.
Nearly one-third of women reaching the age of 65 in 2007 — and about one in five men — can expect to live to at least 90, according to the White House Council of Economic Advisers. Elderly women run a higher risk of living in poverty, the council says.
Given this situation, Treasury officials say they want to remove regulatory barriers that have discouraged or prevented employers from offering an annuity option to workers at retirement.
One proposed regulation would make it easier for employers with traditional pensions to let workers split their benefit — taking part of it in cash and the rest as a monthly paycheck for life.
Employers usually give workers a choice of one or the other. Experts say many workers worried about being able to pay for unexpected expenses will choose the cash — but then might not have the investing skills to make it last.
The other Treasury proposal would allow workers to use a portion of an individual retirement account, 401(k) or similar plan to buy so-called longevity insurance. This is a deferred annuity that workers purchase around the time of retirement, though the benefits don't kick in for, say, 20 years.
"It's much easier to manage spending down your assets for 20 years, if you know that you have income coming in at age 85," says Jody Strakosch, national director with MetLife, which sells such annuities.
This type of annuity is far cheaper than others, too. The council says a 65-year-old buying an annuity that would immediately start paying $20,000 a year would have to pay $277,500 upfront. But the worker would have to pay only about $35,200 at retirement for the same annual benefit to begin at age 85.
Under the Treasury's plan, workers would be able to buy an annuity for up to 25 percent of their account balance, not to exceed $100,000. The annuity would be exempt from minimum distributions that retirees must make from retirement accounts after turning 70
This would appear to be a boon for the industry, but officials say that wasn't the aim.
"This initiative is not intended to favor any particular group or industry — it's intended simply to benefit the American worker and retiree," says J. Mark Iwry, senior advisor to the Treasury secretary. "It is very hard for individuals to protect themselves against the risk of outliving their savings in retirement."
Industry representatives acknowledge annuities can be confusing and say there must be greater education of employers and workers about the product. They note that the annuities being encouraged by Treasury aren't the type that have gotten bad press.
"We are going to have to make our products simpler and easier to understand," says Tom Foster, a spokesman for the Hartford, which offers longevity insurance.
Karen Friedman, executive vice president of the Washington-based Pension Rights Center, says this is an important first step to recognizing the need to turn 401(k) savings into an income stream. Addressing this through workplace plans, Friedman adds, means employers will have a duty to make sure they choose good products for workers.
Friedman says her group will advise that these annuities be simple, transparent and low-cost.
Some fee-only planners, who don't earn commissions from selling products, are a bit wary.
Kirk Kinder, a Bel Air planner, says his first reaction was to wonder if the Treasury was responding to heavy lobbying by the annuity industry.
"I have seen so many shady practices with annuities," Kinder says, citing high costs as one issue.
Kinder says he rarely recommends annuities, and does so only for highly risk-averse clients who no longer want to invest. In those cases, he says, he sticks with low-cost annuities.
The Treasury proposals could very well be a solution to a serious problem. And let's hope that the industry will respond with easy-to-understand, low-cost annuities that provide the security retirees need.