Annuities wholesaled by Obama administration?

[FinanceDude]

Apologies for thread-bumping, but it looks like this idea still has life:

Annuities may be coming to 401(k)s Robert Powell - MarketWatch

All of the testimony can be read here:
Lifetime Income Options For Participants And Beneficiaries In Retirement Plans

Interesting..........wonder which companies the govt would use for this...........

 

[zinger1457]

Interesting..........wonder which companies the govt would use for this...........

The government has offered an annuity option for their TSP plan for many years, it is currently with MetLife. Very few employees have used it, if I recall correctly less than 5% of retirees select the annuity option.

 

[ziggy29]

The government has offered an annuity option for their TSP plan for many years, it is currently with MetLife. Very few employees have used it, if I recall correctly less than 5% of retirees select the annuity option.

As long as it's purely optional (as with the annuitization of TSP) and only sold to those who understand what they are buying, I have no problem with this provided it's actuarially neutral to the U.S. Treasury. It's not that much different than "trading in" some or all of your 401K for a pension, which may be fine in some cases but the devil is in the details. I just don't want to see annuity sales critters preying on people about to retire and giving a high-pressure sales job.

Put another way, I have no problem with this idea IF it's optional and if there is no aggressive marketing campaign to convince people to annuitize.

My concern would be a form of "adverse selection" where someone is more likely to take the annuity option when their parents and grandparents all lived to be at least (say) 85, and their payout is based on average life expectancy. In other words, I would expect an annuity to be more attractive to folks with a family history of longevity, and if the payout is based on overall life expectancy this could be a bad deal for the taxpayers.

As far as only 5% of TSP participants taking the annuity -- were CSRS folks ever in the TSP or was that only for FERS people? I would imagine CSRS retirees would feel less need to "annuitize" any TSP balances because the defined benefit pension under CSRS was likely generous enough to not need "buying" any more pension benefit. I could be wrong but I would imagine more FERS retirees would be interested in annuitizing their TSP than CSRS retirees would be.

 

[Texas Proud]

As long as it's purely optional (as with the annuitization of TSP) and only sold to those who understand what they are buying, I have no problem with this provided it's actuarially neutral to the U.S. Treasury. It's not that much different than "trading in" some or all of your 401K for a pension, which may be fine in some cases but the devil is in the details. I just don't want to see annuity sales critters preying on people about to retire and giving a high-pressure sales job.

Put another way, I have no problem with this idea IF it's optional and if there is no aggressive marketing campaign to convince people to annuitize.

My concern would be a form of "adverse selection" where someone is more likely to take the annuity option when their parents and grandparents all lived to be at least (say) 85, and their payout is based on average life expectancy. In other words, I would expect an annuity to be more attractive to folks with a family history of longevity, and if the payout is based on overall life expectancy this could be a bad deal for the taxpayers.

As far as only 5% of TSP participants taking the annuity -- were CSRS folks ever in the TSP or was that only for FERS people? I would imagine CSRS retirees would feel less need to "annuitize" any TSP balances because the defined benefit pension under CSRS was likely generous enough to not need "buying" any more pension benefit. I could be wrong but I would imagine more FERS retirees would be interested in annuitizing their TSP than CSRS retirees would be.

I would think that it would not affect the taxpayer... the insurace company would be taking on the risk... right IOW, they would say an annuity for someone X old cost Y... then it is their problem...

 

[haha]

My concern would be a form of "adverse selection" where someone is more likely to take the annuity option when their parents and grandparents all lived to be at least (say) 85, and their payout is based on average life expectancy. In other words, I would expect an annuity to be more attractive to folks with a family history of longevity, and if the payout is based on overall life expectancy this could be a bad deal for the taxpayers.

Life companies do not use the same life tables for figuring annuities that they use for life insurance, for the reason that you cite.

Ha

 

[ziggy29]

I would think that it would not affect the taxpayer... the insurace company would be taking on the risk... right IOW, they would say an annuity for someone X old cost Y... then it is their problem...

But what if the insurer starts to struggle because they mispriced the risk, or goes under (and the annuity is above state protection limits)? If this program is "sponsored" by the federal government (even if through a private insurer) I would imagine that in such a case (as in state and local pension shortfalls) the taxpayer may be expected to "make good" on the promise and step in to make them whole.

 

[Texas Proud]

But what if the insurer starts to struggle because they mispriced the risk, or goes under (and the annuity is above state protection limits)? If this program is "sponsored" by the federal government (even if through a private insurer) I would imagine that in such a case (as in state and local pension shortfalls) the taxpayer may be expected to "make good" on the promise and step in to make them whole.

I would bet money that the people who sponsered it would say that the taxpayer would never have to make up for any lost money.... and then when the first one goes belly up the new group in place will say that we have to protect these poor folks from losing all their hard earned money...

 

[BigNick]

As someone who only really knows the SPIA form of an annuity, typically used to convert a tax-deferred retirement account's lump-sum payout into a monthly income, can someone draw me a verbal diagram of what "an annuity in a retirement savings account" looks like?

 

[M Paquette]

I would bet money that the people who sponsered it would say that the taxpayer would never have to make up for any lost money.... and then when the first one goes belly up the new group in place will say that we have to protect these poor folks from losing all their hard earned money...

The proposals I've read include part of the annuity cost on conversion of part of the account going to re-insurance, such as buying coverage from the Pension Benefit Guarantee Corporation. There are limits on what this coverage guarantees.

 

[W2R]

As far as only 5% of TSP participants taking the annuity -- were CSRS folks ever in the TSP or was that only for FERS people? I would imagine CSRS retirees would feel less need to "annuitize" any TSP balances because the defined benefit pension under CSRS was likely generous enough to not need "buying" any more pension benefit. I could be wrong but I would imagine more FERS retirees would be interested in annuitizing their TSP than CSRS retirees would be.

CSRS people can contribute to the TSP, but their contributions are limited to a lower amount, I believe (plus they don't get any matching).

Before interest rates dropped quite so much I was thinking of buying the annuity with part of my TSP. However, all the input from my co-workers, plus input from our agency sponsored retirement training seminars, told me to avoid the annuity. I don't recall anybody from work who planned to take the annuity option, whether FERS or CSRS.

Once the TSP sends the money for an annuity to MetLife, the TSP and government wash their hands of that. They make that perfectly clear - - that your only dealings regarding the annuity is through MetLife, and the government and TSP are out of the picture. You have no more guarantees than any other annuitant with MetLife.

 

[ziggy29]

Before interest rates dropped quite so much I was thinking of buying the annuity with part of my TSP. However, all the input from my co-workers, plus input from our agency sponsored retirement training seminars, told me to avoid the annuity. I don't recall anybody from work who planned to take the annuity option, whether FERS or CSRS.

Agreed. In some situations buying an SPIA for additional retirement income you can't outlive makes sense. It's just a horrible time to buy one in today's low interest rate environment; the amount you have to pay for one dollar of monthly income has probably never been higher.

 

[Independent]

I happened to read the Vanguard written testimony just out of curiosity. I discovered that they are now offering a link to an online annuity quoting service. You have to register to get in, but you do not need to provide real name or email to get quotes. I expect this means that Vanguard no longer offers annuities through AIG, but I didn't look hard to be sure of that.

At any rate, it is one more source of quotes.

 

[FIREd]

I happened to read the Vanguard written testimony just out of curiosity. I discovered that they are now offering a link to an online annuity quoting service. You have to register to get in, but you do not need to provide real name or email to get quotes. I expect this means that Vanguard no longer offers annuities through AIG, but I didn't look hard to be sure of that.

At any rate, it is one more source of quotes.

They still do offer annuities through AIG/American General. But it's now only one of their 5 or 6 offerings.

 

[Nords]

My concern would be a form of "adverse selection" where someone is more likely to take the annuity option when their parents and grandparents all lived to be at least (say) 85, and their payout is based on average life expectancy. In other words, I would expect an annuity to be more attractive to folks with a family history of longevity, and if the payout is based on overall life expectancy this could be a bad deal for the taxpayers.

I think insurance companies are pretty familiar with adverse selection in the longevity tables:
The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).

IIRC Vanguard used to provide online annuity quotes but stopped doing so when AIG started spiraling down the drain... 2007? 2008?