Annuities providers lobbying to be required in 401ks

[explanade]

And even become the default option without the account holders explicitly choosing annuities as the choice.

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

As the columnist notes, people can just withdraw 4% a year, although there would be no guarantees that the 401k balance won't be hit by a severe market downturn. But can retired people, who are no longer contributing to 401ks but not necessarily withdrawing see their balances hurt?

That is, in the meltdown of 2008, we heard about a lot of near-retirement folks seeing their balances go down by almost half. Were there retired people who also got hit?

 

[REWahoo]

This article is discussed in this thread: http://www.early-retirement.org/for...-obama-administration-48633-3.html#post980211

 

[Emeritus]

The major issue with annuities is whether they are "fairly priced". Most annuities in the current marketplace are overpriced and thus a bad deal. Pricing is however something which can be regulated. Many consumer and retirement economists are strong supporters of fairly priced annuities for basic income for pensioners. (Fair pricing includes inflation protection) A DB pension is an annuity.
Major USA opposition comes from those who want to manipulated medicare eligibility, and those who fantasize that they are financial geniuses who can beat the market and their parasitical financial advisers. .
Most other issues can be solved with special insurance for certain types of disasters.
Social secuirty functions as an annuity even though it is not priced as such.

 

[mickeyd]

Annuities in a 401(k) plan...belt and suspenders with a piece going to the insurance company. Who thought that this was a good plan?

 

[ziggy29]

A DB pension is an annuity. .

Actually, a DB pension (to the pensioner) is a lot different than what is proposed here. Not only does the [-]poor schmuck[/-] 401K-based retiree have to worry about how the stock market does, primarily in the last decade or two before planned retirement, but ALSO have to worry about interest rates when it comes time to annuitize at the time of retirement.

So on both ends, a 401K-to-annuity person has their ability to retire determined by market conditions and is largely a lottery as to when you were born and when you planned to retire. A traditional DB pensioner has no such market-driven angst (assuming no default). Market risk in a true DB pension is primarily borne by the pension fund, not the pensioner. Both 401Ks and annuity rollovers from 401Ks have all the market risk on the participant.

Think about someone born in 1945, retiring today at age 65. If you have a DB pension, your benefit did not get screwed by a lousy stock market for the last 10 years or pathetically low interest rates today. You could have slept at night through a lot of this mess. If you have a 401K-to-annuity person, not only did their retirement balances get crushed from 2000-2009, but now they face pathetically low annuity payouts because of the War on Savers and obscenely low interest rates.

Now think about someone retiring in 1999. Even with identical income and saving diligence as the 2008-10 retiree, this person will have far, far more income than someone retiring in 2009 or 2010 who "lost the lottery" of birth year. That's not true of a pension.

This is nothing even close to a DB pension. It adds even *more* market-sensitive "when you were born" risk to retirement than a 401K alone. At least the 401K-only option lets some people wait until the market recovers enough to justify annuitizing on their own.

 

[Emeritus]

Actually, a DB pension (to the pensioner) is a lot different than what is proposed here. ......
Now think about someone retiring in 1999. Even with identical income and saving diligence as the 2008-10 retiree, this person will have far, far more income than someone retiring in 2009 or 2010 who "lost the lottery" of birth year. That's not true of a pension.

This is nothing even close to a DB pension. It adds even *more* market-sensitive "when you were born" risk to retirement than a 401K alone. At least the 401K-only option lets some people wait until the market recovers enough to justify annuitizing on their own.

You are conflating pension eligibility and pension calculation with the pension itself. Whatever the basis for it my pension is clearly an annuity. it pays me an inflation protected sum for the rest of my life. that makes it an annuity.

 

[ziggy29]

You are conflating pension eligibility and pension calculation with the pension itself. Whatever the basis for it my pension is clearly an annuity. it pays me an inflation protected sum for the rest of my life. that makes it an annuity.

But for the most people without the benefit of the DB pension, that doesn't apply. The annuitized payout DB pension recipients (whom I envy more and more each day) don't have their monthly payouts determined by prevailing interest rates at the time they retire.

Hence my statement that someone who has to roll a 401K over into an SPIA at prevailing rates is hostage to market conditions on *both* ends -- the stock market in the years before they retire and interest rates when it's time to annuitize what's in their 401K. Please don't pretend traditional DB pension recipients have these market-based angsts to deal with. Good for you for having one, and I mean that sincerely, but you haven't walked a mile in the shoes of people petrified about their retirement prospects because of their 401K-based hopes and doubts that the market will deliver for them what some pensioners take for granted.

 

[Independent]

The major issue with annuities is whether they are "fairly priced". Most annuities in the current marketplace are overpriced and thus a bad deal. Pricing is however something which can be regulated. Many consumer and retirement economists are strong supporters of fairly priced annuities for basic income for pensioners. (Fair pricing includes inflation protection) A DB pension is an annuity.
Major USA opposition comes from those who want to manipulated medicare eligibility, and those who fantasize that they are financial geniuses who can beat the market and their parasitical financial advisers. .
Most other issues can be solved with special insurance for certain types of disasters.
Social secuirty functions as an annuity even though it is not priced as such.

Are you talking about SPDAs or SPIAs? If it's SPIAs, can you provide a link that supports your statement?

 

[Emeritus]

Are you talking about SPDAs or SPIAs? If it's SPIAs, can you provide a link that supports your statement?

SPDAs are jsut a combination of an investment ssytem and a later annuity.
Which statement did you want supported?

for a general treatment of the value of annuities see
http://www.business.illinois.edu/jbrown/Mypapers/w8064 Brown warshawsky.pdf

For more technical treatment of teh investment consumption issue see
http://www.nber.org/~kling/framing.pdf

Why Don't the People Insure Late Life Consumption?
A Framing Explanation of the Under-Annuitization Puzzle
Jeffrey R. Brown
University of Illinois at Urbana-Champaign and NBER
Jeffrey R. Kling
The Brookings Institution and NBER
Sendhil Mullainathan
Harvard University and NBER
Marian V. Wrobel
Harvard University
January 2008
American Economic Review Papers and Proceedings 98:2 (2008), forthcoming
Abstract: Rational models of risk-averse consumers have difficulty explaining limited annuity
demand. We posit that consumers evaluate annuity products using a narrow “investment frame”
that focuses on risk and return, rather than a “consumption frame” that considers the
consequences for lifelong consumption. Under an investment frame, annuities are quite
unattractive, exhibiting high risk without high returns. Survey evidence supports this hypothesis:
whereas 72 percent of respondents prefer a life annuity over a savings account when the choice is
framed in terms of consumption, only 21 percent of respondents prefer it when the choice is
framed in terms of investment features......


Rather than attempting to rationalize the lack of annuity demand, this paper explores the idea
that aversion to annuities is not a fully rational phenomenon. A large literature has documented
behavioral biases in a wide range of activities that are important steps in the process of planning
for retirement, including whether to participate in employer sponsored pension plans, how much
to save, and how to allocate one’s portfolio. To the extent that individuals exhibit biases in the
wealth accumulation aspects of planning for retirement, it seems natural that similar biases might
also extend to the wealth decumulation stage of retirement planning.

 

[Independent]

SPDAs are jsut a combination of an investment ssytem and a later annuity.
Which statement did you want supported?

The statement that I bolded. Neither abstract suggests that SPIAs are "overpriced". They deal with whether retirees make "rational" decisions. Is there something buried in the papers that isn't in the abstracts?

 

[FinanceDude]

Annuities in a 401(k) plan...belt and suspenders with a piece going to the insurance company. Who thought that this was a good plan?

What do you think most 403Bs are??

 

[FinanceDude]

But for the most people without the benefit of the DB pension, that doesn't apply. The annuitized payout DB pension recipients (whom I envy more and more each day) don't have their monthly payouts determined by prevailing interest rates at the time they retire.

Hence my statement that someone who has to roll a 401K over into an SPIA at prevailing rates is hostage to market conditions on *both* ends -- the stock market in the years before they retire and interest rates when it's time to annuitize what's in their 401K. Please don't pretend traditional DB pension recipients have these market-based angsts to deal with. Good for you for having one, and I mean that sincerely, but you haven't walked a mile in the shoes of people petrified about their retirement prospects because of their 401K-based hopes and doubts that the market will deliver for them what some pensioners take for granted.

I agree. For instance, when my dad reited from teaching, he got 80% of the AVERAGE of his LAST 5 years of teaching salaries as a pension, and then COLA on top of that. He would not matter WHEN he retired or WHAT interest rates were at the time............

 

[Emeritus]

The statement that I bolded. Neither abstract suggests that SPIAs are "overpriced". They deal with whether retirees make "rational" decisions. Is there something buried in the papers that isn't in the abstracts?

In their empirical analysis, MITCHELL ET AL. (1999) use current yields of treasury and corporate bonds as well as cohort mortality tables which are adjusted for selection effects as interest and mortality rates, respectively. They find that in the US in 1995, the average annuity policy generally delivers payouts of less than 91 cents per unit of annuity premium. According to the authors, this transaction cost is mainly due to expenses, profit margins, and contingency funds
citing
MITCHELL, O. S., J. M. POTERBA, M.J. WARSHAWSKY, and J.R. BROWN (1999). "New Evi-dence on the Money's Worth of Individual Annuities." American Economic Re-view 89: 1299–1318.

http://portal.business.colostate.ed...nd - Explaining the Annuity Puzzle (ARIA).pdf

 

[Emeritus]

Please don't pretend traditional DB pension recipients have these market-based angsts to deal with. Good for you for having one, and I mean that sincerely, but you haven't walked a mile in the shoes of people petrified about their retirement prospects because of their 401K-based hopes and doubts that the market will deliver for them what some pensioners take for granted.

I have a DB pension and an IRA and a 403 B and a 457
My wife has FERS, TSP and TIAA CREF

We have both walked in both sets of shoes all our careers.

We treat our DB pensions as the "bond" half of our investments and all the funds are in Equities. we took the same gut wrenching hit everyone else did
We face the same low return on our savings as everyone else.

 

[Emeritus]

I agree. For instance, when my dad reited from teaching, he got 80% of the AVERAGE of his LAST 5 years of teaching salaries as a pension, and then COLA on top of that. He would not matter WHEN he retired or WHAT interest rates were at the time............

to get 80 percent of salary in Md from teh pension system you have to teach about 40- 48 years

 

[explanade]

What is a DB pension?

 

[Bestwifeever]

I have a DB pension and an IRA and a 403 B and a 457
My wife has FERS, TSP and TIAA CREF

We have both walked in both sets of shoes all our careers.

We treat our DB pensions as the "bond" half of our investments and all the funds are in Equities. we took the same gut wrenching hit everyone else did
We face the same low return on our savings as everyone else.

Sorry, your wide variety of retirement assets and income producing sources are nothing like a young person depending on a single 401(k), no pension, and a generation or two before being eligible for what might remain of Social Security. You are a very lucky man, and could probably watch your savings and equities disappear and still have more than enough to live on.

 

[ziggy29]

What is a DB pension?

"Grandpa, what's 'retirement'?"

 

[FinanceDude]

What is a DB pension?

Defined Benefit, whereas the institution that employs you puts money into a fund that pays you a guaranteed monthly amount or lump sum at a certain age. 30 years ago, almost every employer offered these, now there are very few left, mostly they reside with govt workers..........

 

[Emeritus]

Sorry, your wide variety of retirement assets and income producing sources are nothing like a young person depending on a single 401(k), no pension, and a generation or two before being eligible for what might remain of Social Security. You are a very lucky man, and could probably watch your savings and equities disappear and still have more than enough to live on.

This is a different issue. I prepared for retirement since I got out of school. We have lived modestly all our lives compared to my law school and DW's Medical school classmates. My government salary never approached the wages paid to student lawyers from my law school. My wife is a Fed employee. Our kids went to public school and State U.
I live in the house I grew up in. We have been married for 35 years. We traded a lot for the financial security.

I was at one time a full Professor in a Consumer economics department. We had a choice of pensions. I compared the DB and DC options back in 1977 as a new faculty member. All the right wing Chicago school economist writing for the academic market derided the DB system and said you were a fool for going with the DB.

My two children face the future you mention. My youngest graduated from law schoolinto thsi miserable economic environment. IMHO Reaganite trickle down economic nonsense has deeply undermined the social fabric of the country. We are the wealthiest country in the world and our domestic policy seems to be "I've got mine, screw you and yours"

Just one person's opinion

you can't be the best wife ever 'cause I married her

 

[rescueme]

Were there retired people who also got hit?

Sure; retired in early 2007, but I/DW have our cash buckets and SPIA. We can, and are waiting out the storm.

As to SPDA's (the article reference)? That's a different animal, under different circumstances.

I don't know if I would have taken advantage of one at the time of my employment (401k/IRA - no defined benefit plan). However the SPIA worked (and still does) for our situation; then again we only "converted" a small part (10%) of our holdings. I see from the article contents they are discussing converting much, much more to such a vehicle. I personally would have concerns about that.

While we converted a small portion of our retirement portfolio, we still have 90% invested in other areas.

Nothing more than spreading our risk over several retirement investment/income products. Same thing as we have always done...

 

[haha]

That is, in the meltdown of 2008, we heard about a lot of near-retirement folks seeing their balances go down by almost half. Were there retired people who also got hit?

I am not sure I am understanding your question corrrectly, but to answer what I think it is- sure, when you retire the only way to more or less put a floor on your 401k account balance is to put it all in short duration government bonds. The same is true if you are withdrawing from the account. Unless you annuitize, your allocation and the safety of your choices determines your return, your gain/loss, and your eventual balance to purchase an annuity should you wish to annuitize at a later date.

Ha

 

[Independent]

In their empirical analysis, MITCHELL ET AL. (1999) use current yields of treasury and corporate bonds as well as cohort mortality tables which are adjusted for selection effects as interest and mortality rates, respectively. They find that in the US in 1995, the average annuity policy generally delivers payouts of less than 91 cents per unit of annuity premium. According to the authors, this transaction cost is mainly due to expenses, profit margins, and contingency funds.

You didn't quote the rest of the paragraph

They find that this discount has declined over time. They conclude that "the fact that the differential has diminished over time suggests that potential imperfections in the annuity business of two dec-ades ago may be attenuated in today’s insurance market". The question of whether the remaining discount is adequate is, however, not addressed.

I read that to say if the load was 9 cents in 1995, it's probably lower today.

The paper says there have been four explanations given for the "annuity puzzle", but none of them is significant enough to explain the low sales. One of them is the "money's worth" argument which you are calling "fairly priced". You say "The major issue with annuities is whether they are "fairly priced". Most annuities in the current marketplace are overpriced and thus a bad deal. Pricing is however something which can be regulated."

The paper says the opposite. That's why the authors use the next section do describe their idea on a better explanation.

Regulation can be a good idea if "overpricing" is caused by some identifiable market failure - most likely monopoly or asymmetric information. There's no evidence of either for SPIAs.

The 9 cents, or whatever it is today, is the load that insurer's need to offset the risk they are assuming, to cover there expenses in writing and managing the business, and to provide a market based return on capital. You may wish it were lower, it may be that it's enough to offset the advantages of an SPIA for you, but it's not something that regulation can lower.

[PS My youngest also graduated from law school into this miserable environment. It's not pretty.]

 

[explanade]

My father went to some seminar and they're pushing "10-year fixed index annuity" with some 8.5% "bonus" for signing up, I suppose.

Is it some kind of deferred annuity by another name, despite the "fixed" description?

 

[Independent]

My father went to some seminar and they're pushing "10-year fixed index annuity" with some 8.5% "bonus" for signing up, I suppose.

Is it some kind of deferred annuity by another name, despite the "fixed" description?

Yes, that's a deferred annuity. The "fixed" means there is some sort of guaranteed floor on the value at the end of 10 years. The "indexed" means you might get more than the floor value if some index (often S&P 500) does better than some bogey. Different products have different formulas. Anybody capable of comparng a couple of these is smart enough to get an equivalent result buying some portfolio that includes a derivative or two.

The conventional wisdom here is to run away from the salesperson.

Here's a typical view: http://www.forbes.com/2010/08/10/tr...ersonal-finance-bogleheads-view-lindauer.html