Proposal would widen 401(k) options
By Christine Dugas, USA TODAY
A new Treasury Department proposal announced Thursday could provide workers with more options for managing their 401(k) retirement savings.
When many plan participants are ready to retire, they only have two choices: Put it all in an annuity or take it all in a cash withdrawal — and nothing in between.
Retirement decisions have become more difficult because workers who have a 401(k) plan, and not a pension plan, must make sure their savings will last as long as they live. With an annuity, you give a lump sum to an insurance company, which agrees to pay you a monthly amount for life.
“When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings,” Treasury Secretary Tim Geithner said in a statement Thursday.
Until now, few 401(k) plans have offered insurance company annuities because of complicated regulatory rules. And plans have been concerned that they’d be held responsible if an insurance company offering one of the annuities went out of business.
Besides, even when annuities are available, few workers have been willing to take advantage of them, in part because “they have a hard time giving up all their money to an annuity,” says Robyn Credico, defined-contribution practice leader at Towers Watson, a retirement consulting firm.
The Treasury proposal would make it easier for 401(k) plans to allow workers to put a portion of their retirement savings into an annuity when they retire.
“This will protect some of their savings,” Credico says. “But we will have to see if it helps, because there are a lot of other reasons why people have not bought annuities.”
The proposal also would remove the impediments to what is called longevity annuities, a new type of insurance that can help retirees make sure that they don’t outlive their assets by having a stream of income starting at age 80 or 85.
The proposal also would reduce the administrative burdens on employers and clarify the rules to allow workers to purchase an annuity with 401(k) savings and still be able to satisfy rules that protect spouses’ rights as beneficiaries.
The regulations must go through discussion and comments before they’re finalized at the end of the year.
Also Thursday, the Department of Labor finalized the new 401(k) fee-disclosure rule and announced a three-month extension of the date it will take effect. As a result, most plan participants will start receiving the information after Aug. 30 so they can better assess the fees going to brokers and plan providers.
“The common-sense rule that we are finalizing today will shed light on the true costs of 401(k) accounts and ultimately reward those working hard and saving for retirement,” said Secretary of Labor Hilda Solis.
And with more details about fees and expenses, employers and the 401(k) plan participants will “be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement,” Solis said.