Annuities wholesaled by Obama administration?

[FinanceDude]

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Originally Posted by Nords The government's Thrift Savings Plan, perhaps the world's largest collection of index funds and also among the cheapest, includes an annuity as one of its withdrawal choices. So maybe the TSP is just being held up a model of what a 401(k) should offer.

It has always been interesting to me that the TSP is not offered to the general public............

[ziggy29]

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Originally Posted by FinanceDude It has always been interesting to me that the TSP is not offered to the general public............

Well, the financial services industry is a pretty powerful lobby...

[W2R]

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Originally Posted by FinanceDude It has always been interesting to me that the TSP is not offered to the general public............

It's called "benefits". Part of an employment compensation package, other than salary, y'know? We all make, and live with, our choices in employment.

Same as FEHB, the federal employees health care package that everyone has their eye on lately.

There are about a billion federal jobs open and just crying for someone to take them, and take these benefits too. www.usajobs.opm.gov

[FinanceDude]

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Originally Posted by W2R It's called "benefits". Part of an employment compensation package, other than salary, y'know? We all make, and live with, our choices in employment.

No need to be snippy.........

[Independent]

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Originally Posted by REWahoo This is from an article on MarketWatch.com:

Thanks.

[Independent]

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Originally Posted by M Paquette The two big items that I've seen in the proposals and the Request For Comments documents relate to making the option to use an annuity consistent and reasonably easy over all the 401K style plans, and the need to have a better guarantee system behind the annuities than the insurance industry's rather ad-hoc mutual assurance plan with severe limits.

With REWahoo's help, I was able to find a request for information/comments here: Document

I can't claim to have read every work, but I didn't see anything about a "better guarantee system". I wonder if I'm missing something in the request, or if the idea of better guarantees comes from some other source.

[M Paquette]

Oops. Sorry about the lack of links.

Here's the request for information notice from the Federal Register:

Request for Information Notice (HTML)

Request for Information Notice (PDF)

Here are the various referenced documents in the Request:

GAO report on private pension alternatives (PDF)
(This document goes into annuity issues in some depth, and suggests an option of using the Pension Benefit Guaranty Corporation.)

GAO report on risks of low defined contribution plan savings to retirement (PDF)

GAO: Private Pensions: Participants Need Information on Risks They Face in Managing Pension Assets at and During Retirement (PDF)

2007 ERISA Advisory Council’s Working Group on Financial Literacy of Plan Participants and the Role of the Employer report (HTML)

2008, the ERISA Advisory Council’s Working Group on the Spend Down of Defined Contribution Assets at Retirement (HTML)

The good news is that most of us on the ER board are well ahead of 90% of the population, in that we are actually aware of a problem.

[Nords]

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Originally Posted by FinanceDude It has always been interesting to me that the TSP is not offered to the general public............

Quote:

Originally Posted by FinanceDude No need to be snippy.........

Hey, there have to be some incentives for public service. Besides, if anyone could invest in the TSP then why would we need FinanceDudes financial advisers?

Don't blame the government. It's all a Vanguard conspiracy to let them get filthy rich charging 3-5x what the govt earns for managing the same types of assets.

[FinanceDude]

Quote:

Originally Posted by Nords Hey, there have to be some incentives for public service. Besides, if anyone could invest in the TSP then why would we need FinanceDudes financial advisers? Don't blame the government. It's all a Vanguard conspiracy to let them get filthy rich charging 3-5x what the govt earns for managing the same types of assets.

No need for personal attacks..........you sure are touchy about your benefits...........

[clifp]

Quote:

Originally Posted by Nords Hey, there have to be some incentives for public service. Besides, if anyone could invest in the TSP then why would we need FinanceDudes financial advisers? Don't blame the government. It's all a Vanguard conspiracy to let them get filthy rich charging 3-5x what the govt earns for managing the same types of assets.

After the last decade there are plenty of us who don't think public service needs any more incentives. Secure pensions, subsidized medical insurance, high job security, competitive salaries, are all pretty attractive right now, TSP is just icing on the cake. I don't think offering to the public at large would cost any additional money, although I am sure the financial service industry would scream bloody murder.

On the other hand I recently watched The Hurt Locker, and even COLA pension and TSP wouldn't be enough incentive to become an Explosive Ordnance Disposal guy

[fritz]

I investigated TIAA CREF documents when my wife's Credit Union switched from their old provider to them - found that although they are among the lowest cost annuity providers, they non-the-less charged everyone in their program a percentage (annuity) fee for the privilege of enrolling in their program. This was an amount equivalent to standard fees at Vanguard. To quote Vanguard - the lower the costs the more you keep. TIAA CREFF automatically rolls over into an annuity unless you opt out.

The company they were originally with failed to tell them that unless you "opted out" of the standard annuity with the proper form - it stood. If you died on the job - it automatically rolled into an annuity for your heirs (no options available). I discovered that the first company did not advise or provide that "opt out" form. (They gave my wife a $50 gift card for that tidbit of valuable information.)

Three of my kids are/were force enrolled in our state run pension program (annuity). It's one of the worst pension programs I've ever read the documents about. It pays off fairly well - only if you qualify/retire from the state. If you should leave state employment - you only get back what you've put into the system - no growth, no vested interest (only your net initial funds). Imagine 5~10+ years of virtually no growth of your payroll deducted funds (an actual loss due to inflation), and they can get away with it... AND FYI - this state is one of those that has negligently and deliberately underfunded state employees retirement funds (and guess who will suffer for that?)...

Annuities of long ago are based on a job-for-life atmosphere (and still screwed over the little guy). Job-for-life is not the case these days for the majority of workers. Imagine the losses incurred with rolling over your accounts and losing the investment's potential (fees, etc) - as mentioned above. I advised both my daughters to pull their funds when they both left state employment, and roll it over to Vanguard. They both were young enough at the time to recover from our State's mistake program. The other still suffers along with it - with 11 years to go for an anticipated (underfunded) pension. Any bets on how well that will turn out for him?

Anyone still think that Insurance companies will do the right thing?

[FinanceDude]

Quote:

Originally Posted by clifp After the last decade there are plenty of us who don't think public service needs any more incentives. Secure pensions, subsidized medical insurance, high job security, competitive salaries, are all pretty attractive right now, TSP is just icing on the cake. I don't think offering to the public at large would cost any additional money, although I am sure the financial service industry would scream bloody murder.

Could not agree more.........

[freebird5825]

Quote:

Originally Posted by Nords The government's Thrift Savings Plan, perhaps the world's largest collection of index funds and also among the cheapest, includes an annuity as one of its withdrawal choices. So maybe the TSP is just being held up a model of what a 401(k) should offer.

The link to this article is posted for information purposes only...it is very well written and explains some of the options available.

Avoiding Annuities (2/26/10) -- GovExec.com

[Nords]

Quote:

Originally Posted by freebird5825 The link to this article is posted for information purposes only...it is very well written and explains some of the options available.

Great summary, thanks. I was wondering if spouse had to do anything with her TSP when her Reserve pension kicked in at age 60. Looks like she can just let it ride.

[freebird5825]

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Originally Posted by Nords Great summary, thanks. I was wondering if spouse had to do anything with her TSP when her Reserve pension kicked in at age 60. Looks like she can just let it ride.

YW
The author is featured in one of the weekly e-newsletters available at Government Executive online.

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Retirement Planning provides readers with insight on preparing for life after government from Tammy Flanagan, senior benefits director at the National Institute of Transition Planning. This weekly column is delivered on Fridays. To view the latest column, click here.

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Pay and Benefits Watch focuses on the latest news on the world of pay and benefits, from salaries, to the Thrift Savings Plan, health insurance and more. This weekly column is delivered on Thursdays. To view the latest column, click here.

[clifp]

Interesting article, I didn't realize that TSP annuities were actually Metlife annuities. IMO that makes significantly less attractive. Obviously the main reason you get an annuity is to protect against longevity risk. However, I also like the annuity to protect against investment catastrophes.

If you give a bunch of money to Bernie Maddof or an Amerprise adviser and the lose it all, having an annuity is a nice backup plan. However, what continues to worry is the possibility of systemic failures in the life insurance industry. If we have a prolonged period of low inflation and 4-5% returns in fixed income and equities. How does Metlife make enough money to pay back the folks who got the 7% SPIA annuities, not mention the EIA which are currently underwater?

[FinanceDude]

Quote:

Originally Posted by clifp If you give a bunch of money to Bernie Maddof or an Amerprise adviser and the lose it all, having an annuity is a nice backup plan. However, what continues to worry is the possibility of systemic failures in the life insurance industry. If we have a prolonged period of low inflation and 4-5% returns in fixed income and equities. How does Metlife make enough money to pay back the folks who got the 7% SPIA annuities, not mention the EIA which are currently underwater?

I don't know of any 7% SPIAS out there..........

[clifp]

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Originally Posted by FinanceDude I don't know of any 7% SPIAS out there..........

I am sure sometime in the past 30 years that some insurance company has written an SPIA with at least 7% interest rate . I vaguely remember having that option to invest in one when I opened my first IRA in 1982/3 and since mortgages were 12-14% I bet annuities were close to that level.

The point being what if an insurance companies wrote SPIA at very high interest rates and made investments in equities, they could be in trouble. It looks like Annuities were near 7% back in 2000 and I suspect many insurance companies aren't making a profits on those annuities.

[yakers]

I don't remember the details but in the UK a number of insurers went insolvent from issuing annuities at too high a rate.

[Independent]

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Originally Posted by clifp I am sure sometime in the past 30 years that some insurance company has written an SPIA with at least 7% interest rate . I vaguely remember having that option to invest in one when I opened my first IRA in 1982/3 and since mortgages were 12-14% I bet annuities were close to that level. The point being what if an insurance companies wrote SPIA at very high interest rates and made investments in equities, they could be in trouble. It looks like Annuities were near 7% back in 2000 and I suspect many insurance companies aren't making a profits on those annuities.

In theory, an insurance company can lock in most of the interest on a block of SPIAs on the issue date. Suppose I write $100 million of premium on non-COLA SPIAs today. I can (if I have the right mortality table) write down the benefits payments for every month from now until the last person dies. That will be a decreasing list of payments. I then buy a bond ladder that exactly matches the payment stream. Now I don't care what happens to interest rates since I've already locked in my income.

There are obvious problems. The first is that there will be a tail of payments beyond the longest bonds readily available. So the insurer has a reinvestment risk for the tail. Then there are defaults on the bonds and the possibility that the mortality table is wrong. But if the insurer assumed 7% gross investment income when they originally priced the SPIAs, and they actually invested the premiums that way, they don't care if market interest rates fall.

(For COLA annuities, they need investments that track the COLA index. That essentially limits insurers to TIPS backing CPI indexed annuities, and TIPS have low yields because of the high quality.)