Treasury green lights annuities in 401(k)s

By BenefitsPro


By Nick Thornton

The U.S. Department of Treasury has issued final rules on longevity annuities that may help protect retirees from outliving their retirement savings.

For many, increased life expectancy means having to make sure retirement savings last more than two decades. The final rules on longevity annuities, announced today by the Treasury Department, will make the deferred-income option more available to 401(k) and IRA markets.

Longevity annuities shelter a portion of retirement savings and distribute the income at an advanced age, typically 80 or 85.

Under the final rules, participants in qualified retirement plans, or owners of individual accounts, can use 25 percent of their account balance, up to $125,000, to purchase a longevity annuity. That money will be exempted from the minimum distributions required from 401(k)s and IRAs after age 70 1/2.

“All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings,” J. Mark Iwry, senior advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy, said in a statement.

“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

Today’s final rules expand upon those previously proposed by Treasury, raising the maximum investment to $125,000 from $100,000, and allowing for more frequent cost-of-living adjustments.
Treasury’s new regulations also account for a death benefit, allowing the principal in the annuity to be returned to the retirement account in the event that a beneficiary dies before the annuity begins to pay out. That money can then be left to the beneficiary’s heirs.

Individuals who inadvertently exceed the limits on longevity annuities are also allowed to correct the mistake without disqualifying the annuity.

Currently, about one in five 401(k) plans offer annuities in their menu of options, according to Bloomberg News.

New York Life Insurance Co., Mass Mutual and Northwestern Mutual account for 90 percent of deferred-income annuity sales, according to the Limra Secure Retirement Institute.

But without greater clarity on issues such as how to switch insurance carriers and correct some minor rule violations, employers will be reluctant to offer annuities inside 401(k)s and similar plans, Jan Jacobson, senior counsel for retirement policy at the American Benefits Council in Washington, told Bloomberg. The group represents employers.

“We’re very appreciative of Treasury issuing the regulation,” she said. “There may be some hesitation for employers to use this.”

In 2013, deferred income annuities were a $2.2 billion market, less than 1 percent of all annuity sales, according to the Limra Secure Retirement Institute. Deferred income annuity sales have more than doubled for each of the past two years.

Bloomberg News contributed to this report.

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