Senator Herb Kohl, a Wisconsin Democrat, said no one should be forced to buy an annuity as Congress began debate today on how to help Americans make their savings last through retirement.
Legislators and regulators are focusing on investments with income guarantees to supplement traditional retirement plans such as 401(k)s and IRAs as life expectancies increase and more workers manage their own savings. Encouraging savers to purchase annuities, which are insurance products that provide monthly income for life in exchange for upfront payments, is one of the options under consideration by Congress.
“Our goal is to find ways to ensure U.S. retirees have access to lifetime income options that provide adequate consumer protections at a reasonable cost,” said Kohl, chairman of the Senate Special Committee on Aging, at a hearing today.
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 Washington-based Employee Benefit Research Institute. EBRI has a database of 24 million 401(k) participants and 20 million Individual Retirement Accounts.
“The risk of outliving one’s assets in retirement, or longevity risk, has been placed squarely on the shoulders of workers,” said Assistant Secretary of Labor Phyllis Borzi said in testimony for the hearing. The life expectancy of a 65-year-old U.S. male is 82, and 85 for a 65-year-old female, according to the Social Security Administration.
Pension Plan Participants
Half of households in 2007 with someone age 55 to age 64 had financial assets of $72,400 or less, according to the Government Accountability Office, and the average monthly Social Security benefit as of April was $1,067.
The number of participants in traditional pension plans -- where employers generally provide retired employees with lifetime payments -- fell to about 19 million in 2007 from 27 million in 1975. In that same period, workers in defined contribution plans such as 401(k)s increased to 67 million from 11 million, according to the Labor Department.
The Aging Committee hearing today follows a request for comment from the U.S. Labor and Treasury departments in February on retirement security including annuities in plans, and whether regulators should require employers with 401(k)s to offer a lifetime income option or automatically enroll employees who don’t make a selection.
Borzi said at the hearing that of almost 800 responses received by the departments, “perhaps the biggest disagreement among the commenters centers on whether the government should mandate lifetime income as a distribution option.”
Senator Al Franken, a Minnesota Democrat, questioned whether increased financial education for Americans starting in elementary school would help secure retirement savings.
“My mom had an annuity and I think it was a good thing but very few people get an annuity,” he said at the hearing.
Last year, 4 percent of employers offered a 401(k) plan that allowed workers to allocate a portion of contributions to an income guarantee, according to Callan Associates Inc., a San Francisco-based investment-consulting firm. As for employees, less than 1 percent purchase an annuity when retiring, according to Hewitt Associates, a Lincolnshire, Illinois-based human-resources firm.
The insurance industry is developing lifetime income products that address consumer concerns such as inflation protection, death benefits and flexibility for withdrawals, said Bill Mullaney, president of U.S. business for New York-based MetLife Inc.
Flexibility and Cost
“In exchange for that flexibility there’s typically some added cost,” Mullaney said. Workers generally underestimate how long they’ll live and how much they need to save, which is why they should consider annuitizing a portion of savings to provide income for life, he said.
One pending bill, introduced in December by Senators Jeff Bingaman, a New Mexico Democrat, Johnny Isakson, a Georgia Republican, and Kohl, would require corporate retirement plan sponsors to disclose how much monthly income employees’ portfolios would generate in retirement.
Lawmakers should proceed with caution, said Lisa Mensah, an executive director for the Aspen Institute, a Washington policy research group.
“There’s an all-too-common refrain that if we don’t force people to do what we think is best for them, ‘those people,’ will just head to Vegas or buy an RV with their nest eggs,” she said at the hearing. “I propose instead that we keep annuities voluntary but make them easier, safer and a better deal.”