Retirement Plan Blog

04 | 9 | 2009 Posted By Jerry Kalish

With so much going on in the retirement plan arena, I nearly missed the subhead in Pensions & Investments article, Borzi strong on DC fee disclosure issue. (Free registration may be required).

"Borzi", as those of us in the benefit business know, is Phyllis C. Borzi, just nominated by President Obama to be Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). It's the federal agency which has oversight over ERISA reporting, disclosure and fiduciary requirements.

The headline isn't exactly breaking news. Fee disclosure - the word of art is transparency - has been and will continue to be a high priority for the Department of Labor.

The subhead that made me sit up was Annuities, DB concerns also on radar for nominee to lead EBSA (emphasis supplied). The article itself says that Ms. Borzi "also might require 401(k) plans to offer annuities to plan participants to help ensure they have an adequate income at retirement".

It's starting to happen, folks, the annuitization of 401(k) plans: new products being developed, distribution ramping up, and now what may be regulatory and even legislative mandates. And it may be sooner rather than later.

03 | 16 | 2009 Posted By Jerry Kalish

I started writing about annuities almost two years ago when I asked the question (rhetorical, of course), Are 401(k) plans transforming into defined benefit plans?

Since then, the financial industry's race to develop and distribute retirement income products has been accelerating, and I'll be increasing my coverage of this emerging area accordingly.

And one piece of recent news struck me as how competitive the retirement income market is becoming.  

It was the announcement that Lincoln National Life Insurance Company, part of Ft. Wayne, Indiana-based Lincoln Financial Group, won a  $13.1 million jury verdict in a variable annuity patent infringement case against three Aegon USA companies, Transamerica Life Insurance Co., Transamerica Financial Life Insurance Co., and Western Reserve Life Assurance Co. of Ohio.

The patent claim at issue related not to the variable annuity itself but to a computerized method for administering variable annuity products that combine guaranteed minimum payment features with systematic withdrawal programs.

The patent also includes data processing methods used to administer variable annuities in the payout phase and withdrawals from mutual funds, particularly systematic withdrawals from funds.

I'll let the intellectual property lawyers slice and dice this case, but from a marketing standpoint - priceless.

03 | 14 | 2009 Posted By Jerry Kalish

Every once in a while I’ll start to wander off into “Pensionspeak” when I’m talking to a client. And when I do, I’ll catch myself by remembering what one of our important business partners once told me when I started to get too technical. Or even technical at all depending on the audience. He told me that when someone asks you what time it is, don’t tell them how to make a watch. 

And in that spirit, I pass along a better understanding of something that affects us all of us - as plan sponsors, participants, and retirement plan service providers. That's the credit crisis. So here's a nifty video created by designer Jonathan Jarvis called The Crisis of Credit Visualized that helps make it more understandable than would a watchmaker.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

 Now if I could only communicate the 401(k) discrimination rules like this.

Footnote: Jonathan's video is picking up buzz in the blog world. Two influential bloggers, Dan Ariely on his predictably irrational blog and Garr Reynold on his Presentation Zen blog recently featured it.

02 | 3 | 2008 Posted By Jerry Kalish

While most investors these days are focusing on risk in terms of the market and its effect on their account balances, Tim Burns in his blog, Fiduciary Investor, says that they should pay attention to a larger risk. It’s longevity risk, or the risk of a retiree outliving his or her assets. Mr. Burns, in his post, Longevity Securitization, says that
 

The adoption rate of retirement annuities will however, be influenced by; investor perception, pricing, insurance industry risk retention models and the state of the structured investment markets.

Of all the factors that Mr. Burns mentions, investor perception will be the most difficult one with which to deal for two reasons.

First, most investors don't even think there is a longevity risk. According to a recent Fidelity Research Institute study, Structuring Income for Retirement: Addressing America's Emerging Retirement Income "Gap", retirees and pre-retirees are signicantly underestimating how long they need to make their retirement savings last.

Second, there is the annuity puzzle, the term given by the financial service industry to investor aversion to annuities. Some in the industry believe people say "no" to annuities because of: 

•  A desire to leave a legacy
• The complexity of annuities
• A lack of financial literacy
• An aversion to perceived loss
• A desire to maintain control

The need for annuities is certainly there, but it remains to be seen how well the financial service industry will deal with both the logic and the emotion of the matter.
 

12 | 2 | 2007 Posted By Jerry Kalish

I've written about the "annuity puzzle" before. That's the investment industry term for the disconnect between the economic arguments of annuitizing a lump sum amount and the investor’s aversion to doing so. Most of the retirement plan industry attention recently has been focused on the "annuitization" of 401(k) plans. That is, adding annuity options to 401(k) plans in response to retirees and pre-retirees who are significantly underestimating how long they need to make their retirement savings last.

Whether that effort is successful is a topic for another day. But let's not forget that there are still defined benefit plans out there. A recent study by Gary R. Mottola, Stephen P. Utkus at the Vanguard Center for Retirement Research, Lump Sum or Annuity? An Analysis of Choice in DB Pension Payouts, adds to the understanding off the annuity puzzle in a defined benefit environment.

They examined distributions from two Fortune 500 defined benefit plans and one cash balance plan. In brief, their study indicated that many married participants chose to “deannuitize” their benefit in their defined benefit plans. In other words they chose a lump sum over the ERISA-mandated joint and survivor annuity default by submitting the required written, notarized waiver.

Here is what Mr. Mottola and Mr. Utkus say about the implications of their findings:
 

The desire among married participant in their 50s and 60s to “deannuitize” a DB plan distribution appears to be quite strong, and stands in sharp contrast to the inertia typically displayed by defined contribution participants in the accumulation phase. As a result, plan design and policy efforts that rely on inertia and default choices to encourage annuitization within retirement plans are likely to have only modest effects. Meanwhile, the fact that annuitization rates rise with age suggests that the demand for traditional annuities may arise later in life, at an age when many participants have already retired and left their employers’ retirement plans. Also, annuity demand may increase in tandem with the broader trend toward taking a later retirement.

Here is a link (PDF) to their study.

Hat tip to the Financial Page blog.by Barry Barnitz.
 

10 | 5 | 2007 Posted By Jerry Kalish

Back in the day - before the Boomers were called Boomers and before choice entererd the employee benefit lexicon- the standard retirement plan was a defined benefit pension plan. The employer was responsible for the investment of plan assets, and the employee received a monthly income at retirement.  Today the standard retirement plan is a 401(k) plan starting to embrace automatic enrollment, default funds, and an annuity distribution option. The more things change the more they look the same.

09 | 3 | 2007 Posted By Jerry Kalish

I recently wrote about retirees moving to Tibet, a metaphor for retirees moving from the “land of accumulation” to the “land of accumulation” and the new financial culture with which they will have to master. The “tour guides”, the financial industry, will have to solve the “annuity puzzle”, the investment industry term for the disconnect between the economic arguments of annuitizing and the investor’s aversion to annuitizing. It’s a difficult puzzle to solve according to a July 2007 Fidelity Research Institute study which indicated  that retirees and pre-retirees are signicantly underestimating how long they need to make their retirement savings last.

Retirees believe they will need to make their retirement savings last until an average of age 85; for pre-retirees, the average estimate is even younger at age 83. These estimates highlight how many pre-retirees underestimate their life spans, and therefore risk outliving their assets, given the likelihood of living to at least 90 for men (24%) and women (35%) who have reached age 65.

While there are a myriad of barriers to adoption of annuities – some based on emotion and some on logic – the study found that each is potentially solvable by improved investor education. Here is the link to the the Fidelity study, Structuring Income for Retirement: Addressing America’s Guaranteed Income “Gap” (24 pages, PDF).
 

06 | 26 | 2007 Posted By Jerry Kalish

401(k) plan focus is shifting from the accumulation phase to the distribution phase. The why is obvious. The first wave of Baby Boomers are reaching age 60 who have significant concerns about running out of money. The how is being provided by 401(k) providers - insurance companies and mutual funds - who are beginning to address the need by adding lifetime annuities as 401(k) distribution options. That it’s now an industry is evidenced by the activities of the Retirement Income Industry Association, a trade group formed to deal with retirement income challenges.

The regulators are not unaware of the potential for abuse. The NASD and a group of state insurance commissioners are calling for uniform regulation of annuities by having the states add a suitability requirement for all annuity products. Not unlike, the suitability requirement that the NASD imposes on broker/dealers.

To make it work, retirement plan sponsors will have to decide whether to allow advisors into the workplace. The Pension Protection Act provides fiduciary relief to plan sponsors in this regard, but it remains to be seen if that will actually happen.