Here’s a rundown on the changes of keenest interest to insurance advisors...
By Linda Koco
A new proposal from the Pension Benefit Guaranty Corp. (PBGC) includes unmistakable support for the use of annuities to secure lifetime income in retirement.
Posted today on the Federal Register, the proposal aims to reassure workers and retirees who roll their defined contribution plan assets, such as 401(k) assets, into the defined benefit plan of the same employer. The reassurance is that PBGC won’t ding the rollover assets if the defined benefit plan receiving the rollovers should be terminated and come under PGGC trusteeship.
The details on the proposal get technical very fast, but the overriding message is as clear as a bell: "What we're doing will hopefully give people an incentive to choose a savings option that they can't outlive or outspend," said Josh Gotbaum, director of the PBGC.
"Annuities always offer greater retirement security," Gotbaum said in a statement.
The PBGC is a non-profit corporation established under the Employee Retirement Income Security Act (ERISA) as a part of the U.S. Department of Labor. It guarantees the payment of retirement benefits under defined benefit plans that have been terminated with insufficient funds.
A bigger annuity
The PBGC proposal creates safeguards for benefits that are rolled from an employer’s defined contribution plan into the same employer’s defined benefit plan. This assumes that the plans allow for rollovers.
One proposed safeguard is that pension benefits earned from a rollover generally would not be affected by PBGC's guarantee payout limits. (The maximum yearly guarantee for a 65-year-old retiree is currently almost $59,320 a year.) In addition, rollover amounts generally would remain untouched by PBGC's five-year “phase-in” limits.
The proposed safeguards wouldn’t even come into play if the pension plan never runs into the kind of trouble that causes termination and the involvement of the PBGC, Marc Hopkins, PBGC press secretary, said in an interview with InsuranceNewsNet. “In fact, we hope we’ll never be involved.”
But if a plan does end up under PBGC trusteeship, the safeguards should alleviate worry about the rollover funds in the plan. In other words, “We won’t ding them,” Hopkins said.
Annuity professionals typically do not get directly involved with plan terminations, although their clients might be affected.
Even so, professionals in the annuity business might take the PBGC proposal as a booster shot, a government effort that underscores the role that annuities play in providing guaranteed lifetime income.
Hopkins said people who do roll their defined contribution assets into a defined contribution plan will be able to get a “bigger annuity” or pension benefit.
By bigger benefit, he said he means a bigger guaranteed income benefit from the defined benefit plan, which is essentially an annuity.
“Our position is that it is better for workers to have a larger amount of lifetime income, because that leads to more security” in retirement, he said.
Hopkins said his agency believes the proposal should relieve worries that some plan participants may have that PBGC maximum limits could possibly reduce their value of the money they rolled into the plan.
In 2012, the U.S. Department of the Treasury and the Internal Revenue Service issued rulings to clarify requirements for use of rollover amounts in providing additional benefits under a defined benefit plan.
Now PBGC said it is seeking to provide “guidance on treatment” for those rollovers.
Significantly for the industry, the proposal document says this is in “anticipation of increased use of rollovers,” and as part of PBGC’s efforts to “promote retirement security.”
Rollovers can help preserve participants’ retirement savings until retirement, the proposal document maintains. “They provide a valuable means for participants to withdraw their benefits from one retirement plan and contribute them to another.
“Rollovers to defined benefit plans also provide lifetime-annuity protection at a competitive cost.
“Consistent with the administration’s initiative on retirement security, PBGC wants to encourage the rollover and annuitization of distributions from defined contribution plans by providing assurances to participants that their benefits attributable to rollover amounts to a defined benefit plan will largely be protected from the limitations that might otherwise apply if the plan terminates and is trusteed by PBGC.”
The PBGC has opened a 60-day comment period on the proposal, via website at http://www.regulations.gov, email at firstname.lastname@example.org, fax at 202-326-4224 or mail at 1200 K St. N.W., Washington, DC 20005-4026.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at email@example.com.
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