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Exclamation Annuities wholesaled by Obama administration?
Old 02-09-2010, 10:41 PM   #1
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Exclamation Annuities wholesaled by Obama administration?

This article on annuities for retirement caught my eye today:

Insurers Test Market as Obama Opens Door for 401(k)s (Update1) - Bloomberg.com
"Insurers and mutual-fund companies are starting to sell retirement accounts with built-in annuities in response to concerns Americans will outlive their savings..."
A Google or two and I find that the proposal is part of the "Middle Class Task Force" recommendations Biden et al are coming up with:
http://www.whitehouse.gov/sites/defa...Task_Force.pdf

It's under this goal...
Updating 401(k) Regulations to Improve Transparency and Reliability...
  • Promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation.
Back to Google and I find this analysis:

Your Money - The Unloved Annuity Gets a Hug From Obama - NYTimes.com

With this bit of information:
President Obama did not discuss annuities in his State of the Union address on Wednesday night, probably figuring that viewers had enough problems staying awake. But the mere mention of them by the task force was enough to send executives at the insurance companies that sell the products into paroxysms of glee.


“I never thought I’d have the president as a wholesaler for us,” said Christopher O. Blunt, executive vice president of retirement income security at the New York Life Insurance Company. “This is awesome. I’m trying to see if I can get him to do a big broker meeting for us.”


Uh-oh. Anything a life insurance exec likes is probably a bad deal for me...



But maybe not. Google Mark Iwry, one of the wonks quoted in the Times article. You can find several academic papers he wrote at Brookings before becoming the senior adviser to the Treasury secretary and deputy assistant secretary for retirement and health policy.

The basic premise isn't too far off from the three-legged stool approach to retirement distributions discussed here at length (pension / annuity, savings, SS), so I'm open to the idea getting some play.

But we'll see what comes out after the insurance lobby has a chance to twist a few arms. (And the mutual fund / brokerage industry fights back to keep its share of the pie.)
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Old 02-10-2010, 12:04 AM   #2
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In the same way that 'what once were vices now are habits' (A little Doobie Brothers for you) I could easily see how the government, starting with perfectly good intentions, could screw this up badly. Once the insurance companies start lobbying for favorable rules, who knows what could happen?

On the other hand, you make a great point. In this case, the insurance lobby will have to beat the entrenched community of '401k helpers' (brokers, banks, etc) on their home field. Well, except for those insurance companies that ARE brokers/banks/etc. Sigh.

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Old 02-10-2010, 07:47 AM   #3
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Uh-oh. Anything a life insurance exec likes is probably a bad deal for me...
I don't know. If the result is more options available in your 401(k), who can complain with that. Naturally the devil is in the details. But some of the same folks who are pushing this have been pushing for lower 401(k) fees, so there is at least reason to hope that we can get some more investment options without giving up anything in return.

Now I understand that a large group of folks here look down on annuities. But most everyone here is a DIY investor. Not everyone has the time or inclination to become expert enough to "do it yourself" in every aspect of their life. When I need my brakes fixed I take my car to a professional and pay a huge price over what it would cost to do it myself. Meanwhile my brother inlaw has no problem tearing an engine apart and rebuilding it. He thinks I'm silly for paying a mechanic to do stuff that I could do myself. But on the other hand he can't tell a stock from a bond from a cow.

So if someone wants to take their savings and convert it into a fixed annuity so they don't have to trouble themselves with managing a portfolio, I think its good for them to have the option to do it.
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Old 02-10-2010, 07:53 AM   #4
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As long as this is voluntary, as long as people realize this leaves nothing to pass on to heirs and that the costs and fees are transparent, whatever...

This only addresses half of the problem, though. Unlike traditional DB pensions, this still doesn't address the fact that two different people born at different times could put identical amounts into identical investments over a similar time period and still have radically different payouts in retirement based on the luck of when you were born, when you worked and when you retired. I think that's one aspect of a pension-based retirement that the 401K world won't ever be able to overcome. Someone retiring in 1999 would get a LOT more than someone retiring in 1982, for example, which wouldn't happen with a pension.
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Old 02-10-2010, 12:11 PM   #5
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I'll join the chorus that says there is nothing inherently wrong with an immediate annuity purchased for income purposes (as opposed to the typical deferred annuity which is sold for accumulation).

I'm always concerned when the gov't gets involved. The lobbyists will definitely try to take a good idea and turn it into a wealth transfer scheme. But we've already got mutual fund lobbyists all over the 401k industry, adding a few from the annuity providers probably won't make things worse.

The keys to me are: 100% voluntary, full disclosure (you've got to know the negatives), and keep the gov't out of the subsidy/guarantee business.

With Cass Sunstein working for Obama, we can expect some sort of "nudge" on this.
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Old 02-10-2010, 12:19 PM   #6
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As long as this is voluntary, as long as people realize this leaves nothing to pass on to heirs...
Incorrect. You can get an SPIA with a guaranteed period (with a slightly smaller monthly payment) that will continue payments to your beneficiaries if you pass before the term ends. In fact, my SPIA will continue payments beyond the term if either my wife/myself continue to live after the guarantee period (which was based upon our joint remaining life estimate at time of purchase).

FYI...
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Old 02-10-2010, 12:26 PM   #7
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Incorrect. You can get an SPIA with a guaranteed period (with a slightly smaller monthly payment) that will continue payments to your beneficiaries if you pass before the term ends.
Well, that's splitting hairs, IMO. The bottom line is that an SPIA generally isn't a tool to use if you plan to pass wealth to your heirs. The "X-year guaranteed" is just a way to avoid getting totally hosed by dying shortly after purchasing the annuity (at the cost of a reduced monthly payout).
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Old 02-10-2010, 12:49 PM   #8
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Well, that's splitting hairs, IMO. The bottom line is that an SPIA generally isn't a tool to use if you plan to pass wealth to your heirs. The "X-year guaranteed" is just a way to avoid getting totally hosed by dying shortly after purchasing the annuity (at the cost of a reduced monthly payout).
It's not splitting hairs - it was a direct response to a statement that was not 100% valid. Nothing more, nothing less.

BTW, a product like an SPIA is only part of a retirement income management plan. It is not necessarily used to pass on residual estate value, but rather to help insure a constant source of income during a period of your life. No different than having different investments to spread risks, or having a more conserative AA in retirement, than in the accumulation years.

Our SPIA was purchased with 10% of our joint retirement portfolio value. The other 90% of the portfolio, along with the remainder of our non-retirement portfolio assets (such as our home and personal property) represents more than 95% of our current estate residual assets.
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Old 02-10-2010, 05:21 PM   #9
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The bottom line is that an SPIA generally isn't a tool to use if you plan to pass wealth to your heirs.
That's my understanding too.
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Old 02-10-2010, 05:41 PM   #10
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The bottom line is that an SPIA generally isn't a tool to use if you plan to pass wealth to your heirs.
Well, not if you plan to pass *THAT* wealth to your heirs, that's for sure!

'Cause that money is already spent. If you just spent, say, 25% of your nestegg on an SPIA, your heirs might get something from the rest of your investments.
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Old 02-10-2010, 06:43 PM   #11
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"Insurers and mutual-fund companies are starting to sell retirement accounts with built-in annuities in response to concerns Americans will outlive their savings..."
... But the mere mention of them by the task force was enough to send executives at the insurance companies that sell the products into paroxysms of glee.
But we'll see what comes out after the insurance lobby has a chance to twist a few arms. (And the mutual fund / brokerage industry fights back to keep its share of the pie.)
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.
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Old 02-10-2010, 06:55 PM   #12
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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.
FYI...a real life example of how this withdrawal choice really w*rks...

This is exactly what I did when I FIREd at age 48. All I had to do is resign voluntarily to kick in this often overlooked option of the TSP.
IRS 72(t) SEPP tax laws allowed me to take periodic payments without penalty for being under 59 1/2 years old. I pay federal taxes on the payments at my current and greatly reduced income bracket. NYS gets nothing <snicker> because the TSP was part of the FERS government pension plan.
I lucked out and got a fixed rate of 5.25% when it was converted in July 2007. Current interest rate for this withdrawal choice is 3.75% per the TSP site.
Annuity details: single level payments with no survivor (not married), MetLife is insurer, any balance remaining (sans interest) unpaid goes to my estate.
I am definitely not the typical annuitant, starting this option at age 48. If I live long, I shall prosper.
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Old 02-10-2010, 11:03 PM   #13
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Unlike traditional DB pensions, this still doesn't address the fact that two different people born at different times could put identical amounts into identical investments over a similar time period and still have radically different payouts... Someone retiring in 1999 would get a LOT more than someone retiring in 1982, for example, which wouldn't happen with a pension.
Ziggy, I think I know why this is. But would you please elaborate?
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Old 02-11-2010, 12:14 AM   #14
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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.
TIAA-CREF, a very big mutual fund and insurance outfit serving employees of academic institutions, is another example that has many positive attributes. Their plans are very heavily oriented toward retirees receiving payouts as annuities.

These two examples raise another question: If employers already have the ability to design retirement benefit programs with an annuity component, why is a new law needed? Is there a current tax policy that needs to be fixed? Are there other legal issues that make it necessary for the government to prescribe a "good" retirement asset mix and how it should be achieved for the masses? I believe I will read a little deeper...

And just to be clear about my comment about Mr. Blunt the insurance exec, his excitement about increasing Megalife's top line is not my biggest fear. Yrs to Go makes good points about many folks who could benefit from a higher portion of their nest egg directed into a steady-as-she-goes annuity. There are people who should be buying Mr. Blunt's annuities who do not.

It is Megalife's industry history of political manuevers and non-transparent marketing that are my primary concerns. I see both societal and person-specific benefits of this proposal. But those benefits will take a big hit with just a few "tweaks" added in to the program details (or with just a few protections removed). See "Legislation, health care".

For example, suppose this new plan leaves Megacorp free to select the one and only firm from which its employees must purchase an annuity. As with the worst of today's 401k plans, that type of exclusivity only encourages Megalife to win business by wining and dining Megacorp's HR execs, not by offering quality products at fair prices.
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Old 02-11-2010, 01:03 AM   #15
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These two examples raise another question: If employers already have the ability to design retirement benefit programs with an annuity component, why is a new law needed? Is there a current tax policy that needs to be fixed? Are there other legal issues that make it necessary for the government to prescribe a "good" retirement asset mix and how it should be achieved for the masses? I believe I will read a little deeper...
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.

The various proposals include a default option, applied if the employee does nothing, to annuitize part (25-75%) of a retirement account's balance if the employee is over 55 and is not leaving to take another position. This is probably better than handing the employee a lump sum less taxes and penalties. Note that this is merely a default option, and if the retiree is smart enough to check another box on the paperwork, he can do a rollover, or one of the other popular choices around here.

The other proposal is to beef up the guarantees on annuities with something like the FDIC organization, that would provide a better backing and higher limits (more in line with what we hope retirees would have in their accounts) than current practices, which typically cap out at 100K (or 80% of the sum of all annuity purchases not exceeding 100K here in California), to be paid by other insurers, if they can spare it.
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Old 02-11-2010, 07:59 AM   #16
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I was out getting my monthly free dinner, courtesy of a local financial whomever.

I was surprised at his joy with Obama, as most other financial dinner people pretty much hate the guy. Now that I see the reference points I understand that insurance-focused advisors have more to gain from this.

Ok, is it a bad thing? If it increases competition, and these crappy 401(k) offerings get better, it is a good thing. Still, I think we have to reconcile to the fact that financial offerings are not designed with your best interest as a goal. It is about building cash streams for the large company. And there will always be a certain contingent that make a percentage off the instruments. Madoff and all the rest will be back in spirit, in different bodies, bilking a different set of citizens.
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Old 02-11-2010, 09:22 AM   #17
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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.

The various proposals include a default option, applied if the employee does nothing, to annuitize part (25-75%) of a retirement account's balance if the employee is over 55 and is not leaving to take another position. This is probably better than handing the employee a lump sum less taxes and penalties. Note that this is merely a default option, and if the retiree is smart enough to check another box on the paperwork, he can do a rollover, or one of the other popular choices around here.

The other proposal is to beef up the guarantees on annuities with something like the FDIC organization, that would provide a better backing and higher limits (more in line with what we hope retirees would have in their accounts) than current practices, which typically cap out at 100K (or 80% of the sum of all annuity purchases not exceeding 100K here in California), to be paid by other insurers, if they can spare it.
Can you give me a link to the "Request for Comments documents"?

Rather than annuities as the default option, I'd prefer that 401k administrators simply publicize the choice. When you leave, you're told that you must check a box on this form. Maybe the annuity would be the first item on the form. The fine print might say what happens if you never return the form, but the administrator makes more than one attempt at getting you to fill it out.

I'm very skeptical of federal guarantees for private decisions. We've just watched the mortgage version of that implode.

The FDIC is a nice-to-have for consumers. But, the reason it's important public policy is that we've learned that a run on the bank can hurt everyone, not just the bank or its direct customers. I don't see a similar public interest in annuities.

It's conceivable that the federal gov't could reinsure the mortality component of SPIAs only. The rationale would be that an extension of life spans beyond some level is a systemic risk that no insurer can bear. (Kind of like reinsuring property insurers against really big terrorist attacks.) But the details would be devilish.

I don't see a reason to give people who select SPIAs an investment guarantee that's any stronger than the guarantees that mutual fund investors get. If I want an SPIA with investments that are backed by the US gov't, I should buy one that only invests in US treasuries and accept the same yield haircut that any other treasury investor gets.
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Old 02-11-2010, 09:53 AM   #18
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Ziggy, I think I know why this is. But would you please elaborate?
Because those who buy an annuity with their retirement investments in 1982 would have been selling at a time when those investments were very cheap. It would have been partially offset by the higher interest rates assumed in the calculation of the monthly payout, but it still would have been a heck of a lot better to cash out your stocks and buy an annuity in 1999.
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Old 02-11-2010, 09:55 AM   #19
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Can you give me a link to the "Request for Comments documents"?
This is from an article on MarketWatch.com:

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Written comments responding to the lifetime income RFI may be addressed to the U.S. Department of Labor, Office of Regulations and Interpretations, Employee Benefits Security Administration, N-5655, 200 Constitution Ave. NW, Washington, DC 20210, Attn: Lifetime Income RFI.

You also may submit comments electronically by email to E-ORI@dol.gov or through the federal e-rulemaking portal. Visit Regulations.gov.
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Old 02-11-2010, 09:57 AM   #20
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These two examples raise another question: If employers already have the ability to design retirement benefit programs with an annuity component, why is a new law needed? Is there a current tax policy that needs to be fixed? Are there other legal issues that make it necessary for the government to prescribe a "good" retirement asset mix and how it should be achieved for the masses? I believe I will read a little deeper...
I'm skeptical of government meddling, but for the most part you're right: The option to cash out the investments in an IRA or 401K and use the proceeds to buy an annuity are already available.

In reality, the only thing they could do differently is create something like a true "pension fund" that someone contributes to instead of their 401K in stocks, in an attempt to remove the "timing lottery" aspect of saving for retirement (that is, someone wouldn't be screwed for their bad luck in terms of when they were born, when they worked and when they retired). But that would be another potential place for government to hemorrhage more red ink if they overpromised on the pension payouts as quite a few state and local pension plans have -- and I don't think the taxpayers need any more risk with unfunded and underfunded liabilities and entitlements.
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