Many 401(k) plans have few annuity or guaranteed income options for workers and the Department of Labor could do more to encourage employers to adopt lifetime income options, a report by the Government Accountability Office has found.
The DOL should provide plan sponsors with clearer criteria to determine whether providers will able to pay future claims, the GAO said in its 78-page draft report.
While employers have limited safe harbor provisions from liability when it comes to investments in the accumulation phase of an employee’s lifetime, “no such incentive exists from plan sponsors offering a mix of lifetime income options,” GAO researchers said.
As a result, many employers are deterred from offering annuities in their plans because companies don’t want to be found liable in the future if an insurer or annuity company stops paying claims.
Likewise, the DOL should encourage employers to seek more choices from custodians and other service providers so that employees have a broader palate of lifetime income selections to choose from, the GAO report said.
The report, titled “401(k) Plans: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants,” was published last month.
The American Council of Life Insurers said the GAO report points to “administrative and legal deterrents that are preventing many employers with 401(k) plans from offering annuities as a payout option.”
“Every day until 2030, 10,000 baby boomers will reach age 65,” said ACLI President and CEO Dirk Kempthorne in a statement. “Without the guaranteed lifetime income that annuities provide, many will be unprepared for retirements that could last 20, 30 years or more.”
In response, DOL Assistant Secretary of Labor Phyllis C. Borzi, said the department had reservations about the GAO’s recommendations.
Helping plan sponsors minimize legal liability with regard to selecting insurers capable of guaranteeing lifetime payment risks “degrading the oversight required of a fiduciary responsible for protecting the rights and interests of participants and beneficiaries,” Borzi wrote in a four-page response.
“We believe a better approach to the issues identified in your draft report is to explore efficient and cost effective ways to put the evaluation of the annuity provider in the hands of fiduciaries with financial expertise” capable of satisfying the requirements of the Employee Retirement Income Security Act, or ERISA, Borzi wrote.
Better to let insurance and other financial services companies innovate and develop products that meet the need for guaranteed income, or develop fiduciary services designed to evaluate the characteristics of an annuity provider, she added.
One recent product development is the inclusion of qualified longevity annuity contracts, or QLACs, into target date funds, which the retirement industry expects more plans will adopt as a default option for retirement plan investors.
GAO researchers generated their data from a questionnaire administered to 11 401(k) plan record keepers which account for 42 percent of the 401(k) plan market by plan assets.
The GAO found:
* About two-thirds of the plans it reviewed did not offer withdrawal options.
* About three-quarters of plans did not offer an annuity option.
* Many plans don’t offer partial annuitization.
* Plans’ access to annuities may be limited by their record keeper.
* Plan participants may not have the information, education or financial advisor needed to make informed decisions about lifetime income options.
* Employers and plan sponsors in many cases may not offer adequate information to help employees make an informed decision about lifetime income.
With the demise of private sector pension plans managed by professional advisors and the rise of the defined contribution model managed primarily by employees, many retirement industry experts say access to annuities is a critical tool to help fill the role once ascribed to pension plans.
At the end of 2014, there were more than 500,000 401(k) plans in the U.S. The plans covered more than 60 million participants and held more than $4 trillion in assets, according to the GAO report.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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