Why guaranteed lifetime withdrawal benefit election rates continue to rise.
By Cyril Tuohy
Obfuscation is opaque by design. Who knew that disclosure could be so complicated, too?
With the U.S. Department of Labor (DOL) considering new rules informing retirees of how long their assets will last them in retirement, now comes the issue of mandating exactly what lifetime retirement income to disclose, and how to disclose it.
On one side is the insurance and annuities industry, which believes the DOL is doing workers a favor by showing them how long their retirement assets would last under a guaranteed income program — a product they happen to sell.
On the other side is the mutual fund industry, which says the DOL is taking too narrow an approach and misleading investors and retirees about their assets and incomes in retirement.
The American Council of Life Insurers (ACLI) is more than happy to see Uncle Sam use annuity-based retirement calculations to model a guaranteed monthly payment for life beginning at normal retirement age for workers' 401(k) and 403(b) plans, a departure from the asset-based view with which most employees examine their savings.
“It re-frames the defined contribution plan as a retirement plan that is intended to generate retirement income, rather than just a capital accumulation or savings plan,” ACLI said in written testimony to the DOL.
It’s easy to see why the ACLI is pleased. Insurance underwriters and financial advisors stand to make billions of dollars as workers learn more about the importance of guaranteed income products. With guaranteed income products getting a boost in the wake of the crisis when retirees saw their savings evaporate in the blink of an eye, the DOL’s proposal would give the insurance products what critics call free advertising.
DOL’s calculations are designed to benefit workers like James C. Cooper, a retiree living in Silver Spring, Md. Monthly income estimates would allow workers like him to better understand how prepared they are for their golden years. “I have a number of friends and family that are bright professionals and now find that they are really not financially prepared for retirement,” he wrote, in testimony delivered to the DOL.
Lobbyists for the $14 trillion dollar mutual fund industry are none too pleased about the “preferred status” that they say the DOL appears to have granted to annuity-based calculations to illustrate lifetime retirement income.
Interest rate variability years from retirement and a Labor Department bias — perceived or real — that retirees are better off annuitizing retirement accounts isn’t sitting well with the Investment Company Institute (ICI).
The DOL’s “rigid approach” would replace “innovative methods” used by retirement service providers and could even ”mislead participants and would discourage the development and availability of other approaches that could be more effective,” wrote David M. Abbey, ICI’s senior counsel for pension regulation, in an Aug. 7 letter to the DOL’s Office of Regulations and Interpretations.
At the very least, the ICI said, the DOL needs significant clarifications to its annuity-based illustrations to avoid misleading retirees about how long their assets would last. High fees charged by annuities also should be made clear in the income retirement statements, the ICI added.
The ICI, and other groups critical of the DOL’s rulemaking proposal, also is urging the government to be more flexible in its approach and to allow for illustrations of different income streams based on “reasonable assumptions taking into account generally accepted investment theories.”
“Instead of introducing a new mandate for plans, we recommend that the Department provide guidance to encourage greater use of income stream illustrations; we are confident that more and more plans will begin to offer them,” Abbey said.
Other critics like Nathan Schnitman, president of Schnitman Group, a Plano, Texas-based administrator of retirement plans, called the DOL’s projected lifetime income streams a “ridiculous requirement,” and urged the DOL to scrap the measure entirely.
The National Association of Insurance and Financial Advisors, which represents agents who distribute mutual funds and annuities, has backed the idea of informing retirees about how long their retirement assets will last them.
At the same time, NAIFA has carefully avoided taking sides on whether a mandated annuities calculation is better than disclosing other income streams, calling on any DOL-mandated income projections to be “very simple in nature, easily generated, at the discretion of the plan sponsor.”
More than 115 organizations and individuals over the past three months have commented on the DOL’s rulemaking notice in connection with the Lifetime Income Disclosure Act, which has bipartisan support in the House and Senate.
The Lifetime Income Disclosure Act would amend Section 105 of the Employee Retirement Income Security Act to require that current account balances be expressed as a lifetime income stream equivalent.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at Cyril.Tuohy@innfeedback.com.
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