Annuities wholesaled by Obama administration?

[Independent]

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]

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

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]

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]

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]

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]

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]

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]

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
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[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]

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]

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]

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.)

 

[FinanceDude]

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.

The highest I know of today are about 2.5% IRR. Until interest rates go up, I wouldn't put a chunk into a SPIA, unless you have no other options.

I am sure brewer can offer a little more insight.....

 

[haha]

The mother of all options is to put off taking SS until age 70. IMO that is superior to fancy moves like payback and refile, as it is more robust.

Ha

 

[SarahW]

That assumes, Mr. haha, that SS will be solvent at that time. Sort of like a high-risk investment, IMO.

 

[ERD50]

The mother of all options is to put off taking SS until age 70. IMO that is superior to fancy moves like payback and refile, as it is more robust.

Ha

How so? Isn't the payback & refile the best of both worlds? Take it early, if @ age 70 you confirm that taking it @ 70YO is best as expected, you repay & refile. If life has thrown you a curve ball, maybe taking it early was best, then don't repay & refile.

I had planned on taking it at 70YO, it seems like the best move to counter the "what if I outlive my portfolio" concern. But the repay & refile option seems good in the rare case that I might (with the hindsight @ 70YO) be better off financially by taking it early.

By 'robust' - are you referring to the chance they might change the repay & refile option?

-ERD50

 

[rescueme]

The mother of all options is to put off taking SS until age 70. IMO that is superior to fancy moves like payback and refile, as it is more robust.

Ha

My SPIA is allowing me to do exactly that ...

Of course, I'll be filing against my wife at her FRA (we're both 62) at age 66, so I will have SS income (50% of her FRA PIA) for the time I'm 66-69, so I will get a bit of SS income until I file at age 70.

I'm with you on the take it/repay scheme. Too much of a chance of governement intervention, along with paying taxes on $$$ I can't immediately consume, plus loss of my income for those four years from my wife's SS (which does not get repaid), along with the current low returns on "safe" investments which must be used to ensure the $$$ is there to repay the government.

 

[youbet]

Too much of a chance of governement intervention, along with paying taxes on $$$ I can't immediately consume, plus loss of my income for those four years from my wife's SS (which does not get repaid), along with the current low returns on "safe" investments which must be used to ensure the $$$ is there to repay the government.

I agree the issue with our oh-so-fine gov't possibly changing the rules mid-steam is a risk and paying a cpa to do your taxes the year you repay to handle the complications of getting the taxes you paid due to SS back are negatives. But the investment return issue is NOT a problem. Anything over zero is gravy, so a low yielding CD or whatever would work fine.

I started my SS at 62 and will happily collect while living life and learning how things will go. Either poor health will tell me to not bother repaying or to repay at 66 or 70 depending on how things go.

My status is married but with DW ineligilble for SS (mine or hers) due to the GPO and WEP provisions. Collecting my SS early is our strategy to provide her with some longevity insurance should I die early and my pension is reduced to her 50% survivor's portion.

YMMV depending on your personal circumstances.

 

[jdw_fire]

My status is married but with DW ineligilble for SS (mine or hers) due to the GPO and WEP provisions.

WEP doesnt make a person ineligible for their own SS it just reduces the payment.

 

[youbet]

WEP doesnt make a person ineligible for their own SS it just reduces the payment.

Obviously and as stated in my previous posts ( http://www.early-retirement.org/for...evastating-social-security-offsets-47243.html ) on the subject. But when someone's career is primarily outside of SS to the extent that her/his few contributions = a tiny payment and WEP reduces that tiny payment to a tiny, tiny payment, some of us just round that down to zero and do our planning and assumptions based on that.

You might include $30 - $40 per month SS in the calculations as part of the decision process, but I'm sort of a "round numbers" kind of guy and feel comfortable just considering it as non-existant!

The significant thing about our personal situation is that GPO reduces her survivors benefit based on my earnings to zero and that her low level of participation in SS combined with WEP makes her personal benefit inconsequential.

 

[haha]

By 'robust' - are you referring to the chance they might change the repay & refile option?

-ERD50

Yes, that is what I mean. Plus the hassles of getting the taxes paid back, enhanced chance of audit, etc.

I filed for SS at age 67 in Dec 2008, so I could invest heavily without regard t income. I may pay back and refile, it has worked for others. But it does not appear to be without a significant bureaucratic and hassle overhead.

Ha

 

[Htown Harry]

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

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

BOSTON (MarketWatch) — Annuities in your 401(k): It’s beginning to seem less a question of whether and more a question of when and how.

This week, a bevy of retirement-income experts said annuities should be offered as a 401(k) investment option as well as a default distribution option for when workers leave a company. The experts were speaking at a two-day hearing on lifetime-income options for retirement plans hosted by the U.S. Labor Department’s Employee Benefits Security Administration (EBSA) and the Treasury Department.

From this vantage point, it seems like a done deal, and the only questions remaining are those dealing with safe harbor rules, fiduciary requirements and the in-the-way details.

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