Insurers Press U.S. to Let Employers Offer Annuities in Retirement Plans

It should be easier for employers to include annuities in their retirement plans because Americans are at risk of outliving their savings, insurers told Labor and Treasury department officials today.

The government should extend and clarify “safe harbor” protection, which exempts employers from liability, so they can add annuities as an option in 401(k) retirement plans, said Christine Marcks, president of retirement at Prudential Financial Inc., based in Newark, New Jersey, at a hearing in Washington. Annuities also should be permitted as a default investment, Marcks said.

“Some plan sponsors decline to consider offering guaranteed lifetime-income solutions because of a mistaken belief they’ll have fiduciary liability if the insurer’s financial strength deteriorates in the future,” Marcks said.

The two-day hearing, which began today, follows a request for comment from the Labor and Treasury departments that drew almost 800 letters on the issue of lifetime income.

Employers have been reluctant to adopt annuities because of concerns about fees and potential liabilities in picking the insurers. Annuities are insurance contracts that guarantee payments in exchange for upfront payments.

“We have to solve the fiduciary issue first,” said David Wray, president of the Profit Sharing/401k Council of America, a Chicago-based nonprofit representing 1,200 companies with 401(k) plans, at the hearing. “Employers want to know: Is my company guaranteeing this payment for the next 30 years? Am I going to get sued?”

Living Longer

Regulators and legislators are looking at Americans’ retirement security because life expectancies are increasing and savings have shifted from traditional pension plans -- where employers generally provide retired employees with lifetime payments -- to defined contribution plans such as 401(k)s, according to the Labor Department. Participants in defined contribution plans increased to 67 million in 2007 from 11 million in 1975, the agency said.

An estimated 47 percent of Americans born between 1948 and 1954 may not be able to afford basic expenses and uninsured health-care costs through retirement, according to the Employee Benefit Research Institute, which is based in Washington.

Employers are also concerned about fees and how guarantees would be transferred if employees change jobs, said Wray at the hearing today. Last year, 4 percent of employers offered a 401(k) plan with an annuity built in, according to Lori Lucas, defined contribution practice leader at Callan Associates Inc., a San Francisco-based investment-consulting firm.

Investment Options

Prudential and New York-based insurer MetLife Inc., the two largest U.S. insurers, and money managers including BlackRock Inc., based in New York, have been developing investment options that let workers contribute to an annuity within their 401(k)s.

A built-in annuity option is important for workers who don’t choose their own investments, said Robert Sollmann, MetLife’s executive vice president for retirement products, at the hearing. The agency should clarify an employer’s fiduciary duty when picking insurers offering the guarantees, he said.

Vanguard Group Inc., a mutual-fund firm based in Valley Forge, Pennsylvania, said income guarantees should be designed to compliment IRAs, according to Linda Wolohan, a spokeswoman for the company, in an e-mail. That’s because more than 80 percent of Vanguard’s participants who are over age 60 exit their employers’ 401(k) plan within three years of leaving a job, Wolohan said.

Bill Pending

At Fidelity Investments, the average age of a retiree purchasing an immediate income annuity is 67, said Elizabeth Heffernan, a vice president at the Boston-based firm. “This suggests it’s only after retirement that people begin to truly assess and understand their various income needs,” Heffernan said at the hearing.

One pending bill, introduced in December by Senators Jeff Bingaman, a New Mexico Democrat, Johnny Isakson, a Georgia Republican, and Herb Kohl, a Wisconsin Democrat, would require corporate retirement plan sponsors to disclose how much monthly income employees’ portfolios would generate in retirement.

To contact the reporter on this story: Margaret Collins in New York at mcollins45@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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