Treasury Dept. Rules Give Annuities a Boost

New Department of Treasury rules could be a boon for annuities as an option within defined benefit plans.

The rules, announced in early September, simplify rules that allow retirees to simultaneously elect a partial lump sum and a partial annuity from a defined benefit pension plan.

Annuities are rarely offered in DB plans. Those plans that do include an annuity option see little participation, but experts say better regulatory clarity will likely contribute to increased interest.

“This rule will provide pension plan participants with more flexibility when given the option of a lump sum or an annuity,” said Cathy Weatherford, president and CEO of the Insured Retirement Institute.

“It removes the all-or-nothing choice that these workers must make when given the option, and in doing so, it will hopefully encourage more Americans to take their benefit, at least in part, in the form of a lifetime income stream.”

The new rules apply to distributions with annuity payments starting in plan years beginning on or after Jan. 1, 2017, and are intended to encourage plans to offer hybrid distribution options that include an annuity, Treasury Department officials said.

Under the tax code, the minimum present value of a benefit offered by a pension plan cannot be less than the present value calculated by using a specified mortality table and interest rate.

First proposed in February 2012, the regulations are an attempt to balance retirees’ need for longevity insurance through partial annuity payments with the increased liquidity provided by lump sum payouts.

The rules change came on the heels of a Government Accountability Office report that admonished the Department of Labor for not doing enough to encourage workers to consider lifetime income options. The report focused on workers who rely on their 401(k) plans to finance their retirement.

The GAO came from responses from retirement plan administrators to a questionnaire. Those administrators represent more than 40 percent of all 401(k) assets and about a quarter of plans at the end of 2014.

The GAO found that of the plans covered by the questionnaire, about two-thirds did not offer a withdrawal option — payments from accounts, sometimes designed to last a lifetime — and about three-quarters did not offer an annuity, which are arrangements the GAO said can guarantee set payments for life.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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