By Liz Festa, Andy Stonehouse
As part of a busy day of government announcements related to the retirement world, the Obama Administration has given new endorsement to the use of annuities in defined benefit and defined contribution retirement plans.
The move came the same day as deadlines were delayed and final rulings issued regarding the Department of Labor's so-far often-postponed 401(k) fee disclosure regulations.
The dual measures from the U.S. Treasury, the IRS, and the White House’s Council of Economic Advisors, are aimed at expanding transparency in the 401(k) plan marketplace while also broadening the availability of retirement plan options
The administrative package issued would provide regulatory guidance encouraging employers that sponsor both defined contribution and defined benefit plan participants to provide the option
of using their DC payouts to purchase an annuity from the employer’s DB plan.
The Treasury also proposed changes to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment to encourage more retirees to consider partial annuities.
Annuities allow retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.
As well, the Treasury is proposing removing a regulatory impediment to purchasing a deferred “longevity” annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy.
"We agree with the Department's conclusion that lifetime income options can provide greater certainty in retirement and minimize the risk of retirees outliving their retirement savings
," said Cathy Weatherford, CEO of the Insured Retirement Institute.
"And we are encouraged by the guidance package released today that includes steps to encourage partial annuity options, remove barriers to purchasing annuities, and clarify rules that apply when plan sponsors offer lifetime income options under their plans."
In relaxing the Application of Required Minimum Distribution rules to accommodate longevity annuities in DC plans, the Administration said it realized those rules impeded the ability to include longevity annuities in plans and traditional IRAs.
“One of the improvements offered today will exempt longevity annuities (up to a specified limit) from RMD rules to enhance the ability of 401(k) plans and IRAs to offer individuals the option to use an 'affordable' portion of their account balance to purchase a longevity annuity,” stated the White House Council.
These rules were put in place to ensure that retirement plans are used to provide retirement security rather than avoid estate taxes on bequests to heirs.
The Treasury is also is clarifying rules for plan rollovers to purchase annuities and spousal protection rules for 401(k) deferred annuities. In two revenue rulings issued today, Treasury clarified the rules that apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer’s defined benefit pension plan.
Employers can also offer their employees the option to use 401(k) savings to purchase deferred annuities
and still satisfy spousal protection rules with minimal administrative burdens.
Both of these rulings would facilitate the availability of flexible options for employees so that they can better use their 401(k) savings to achieve financial security in retirement, Treasury said.
The CEA has prepared a detailed report describing the significance of today’s actions, which can be accessed here.
“Today’s Treasury and IRS actions will facilitate the creation of new lifetime income choices to help Americans manage their hard-earned savings in retirement," the CEA's CEO stated on the White House and Treasury blogs today. "While we know average life expectancies, it is impossible for individuals to know how long they will live. As a result, many retirees risk outliving their savings or unnecessarily limiting their spending in retirement because of the fear of outliving their savings."
Meanwhile, the DOL’s Employee Benefits Security Administration issued disclosure rule that will provide employers sponsoring pension and 401(k) plans with information about the administrative and investment costs associated with providing such plans to their workers.
Now, service providers will have a three-month extension in the effective date of this rule - service providers must be in compliance by July 1, 2012, for new and existing contracts or arrangements.
Originally published on BenefitsPro.com