Retirees with 401(k) plans and individual retirement accounts will have more flexibility to purchase annuities that don’t start paying out until age 80 or 85, under final rules from the U.S. Treasury Department.
The rules announced today provide a new way for retirees to limit the drawdowns of their account balances that are now required starting after age 70 1/2. Instead, under the rules, they could use as much as 25 percent of their account balances up to $125,000 to purchase deferred annuities.
“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live,” Mark Iwry, deputy assistant Treasury secretary for retirement policy, said in a statement.
The Treasury Department’s final rules give the government’s blessing to the concept of longevity insurance, which hasn’t taken hold in the market, in part because of the required distribution rules and because of relatively high fees that deter potential purchasers.
People retiring with lump sums from defined-contribution plans have also been reluctant to lock up substantial portions of their nest eggs in annuities.
About one in five 401(k) plans offers annuities as a choice, according to the Treasury Department. Insurers and employers had been waiting for today’s announcement before they began finalizing details on deferred annuity offerings.
Without more clarity on issues such as how to switch insurance carriers and correct some minor rule violations, employers will be reluctant to offer annuities inside 401(k)s and similar plans, said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council in Washington. The group represents employers.
“We’re very appreciative of Treasury issuing the regulation,” she said. “There may be some hesitation for employers to use this.”
In 2013, deferred income annuities were a $2.2 billion market, less than 1 percent of all annuity sales, according to the Limra Secure Retirement Institute. Deferred income annuity sales have more than doubled for each of the past two years.
A man who purchases a deferred annuity at age 60 for $50,000 can receive $17,614 in annual income for life starting at age 80, according to New York Life.
The contracts make it easier for retirees to figure out how much to withdraw from their accounts each year, and help ensure that they don’t outlive their savings, according to Srinivas Reddy of Prudential Financial Inc.’s retirement business.
“Left to their own devices, I think people are undercalculating the level of risk and longevity they need to save for,” Reddy, who is head of the full-service investments organization, said by phone. “This is directionally the right type of regulation.”
The main risk of a longevity annuity is that the retiree will die before receiving a payout.
The final rules, in a change from those proposed in 2012, allow for return of unused premiums as a death benefit. That change, sought by annuity insurers, will give people an option to get money to their spouses if they die before the annuity begins paying out. Annuities with that cash refund option offer lower guaranteed annual payments.
“It addresses that psychological disincentive to annuitizing for life,” said Bryan Keene, a partner at Davis & Harman LLP in Washington who represents insurers.
With $881 million in sales, New York Life Insurance Co. was the largest seller of deferred-income annuities last year, followed by Massachusetts Mutual Life Insurance Co. and Northwestern Mutual Life Insurance Co., according to data from Limra.
Those three companies accounted for 90 percent of the market in 2013, according to Limra. Other companies that sell the policies include Guardian Life Insurance Co. of America and Principal Financial Group Inc.
“The final rules open the door for employers to help their employees mitigate the greatest risk employees face in retirement: outliving their assets,” Robin Lenna, an executive vice president at MetLife Inc., said in an e-mailed statement.
Iwry announced the final rule at a conference of the Insured Retirement Institute, whose members include MetLife and American International Group Inc.