The 2008 meltdown of many retirement investment accounts has triggered a long and extensive assessment of how to provide safer retirement investments that people can depend upon and understand. The need for better retirement products is widely supported by employers, investment companies, and federal bureaucrats and legislators. But as the fact-finding has continued, the process has exposed exactly how difficult it will be to identify the right products, the right regulations to govern their use, and the right ways to provide consumers with a massive dose of financial education that they need to make solid retirement investment decisions.
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This is a vitally important topic for millions of baby boomers nearing retirement. And don't forget millions of older people who have reached retirement age and are still working as they try to figure out how to repair badly damaged retirement nest eggs. Hats off to U.S. Senator Herb Kohl, Chairman of the Special Committee on Aging, who has been slogging through a series of hearings. While 20 other senators are also members of his committee. the Wisconsin Democrat is usually the only one asking many questions. At a recent hearing, he was the only senator in attendance for much of the session.
There is general agreement that providing retirees with lifetime income products makes sense. Annuities are the only current private-sector form of such products. But they are poorly understood even by many active investors. They are hardly on the radar screen of most participants in employer retirement programs, and experts agree they are poorly explained even when they are included in a retirement plan's choices of available investments.
For an investment, either provided in a lump sum or a series of payments, a basic annuity will return a monthly check for the life of its owner. Only insurance companies can sell annuities and they are on the hook for guaranteeing those payments will continue. A simple fixed annuity provides a known return that will not decline if the stock market tanks. It is safe and provides certainty, which is what retirees say they want. Yet when retirement accounts roll over, and their holders are offered a choice about what to do with their assets, nearly no one chooses an annuity.
[See What You Need to Know About Annuities.]
"The difficulty is that even when they're offered, participants don't choose them," testified Phyllis Borzi, U.S. Assistant Secretary of Labor with the Employee Benefits Security Administration. Part of the problem, she and other experts testified, is that people don't have the tools to evaluate how much income they will need in retirement or even a good sense of how long their retirements are likely to last.
J. Mark Iwry, Deputy Assistant Treasury Secretary for Retirement and Health Policy, thinks people underestimate how long they're going to live. Even if they do understand average life expectancies, he testified, they tend not to consider that they may be among the 50 percent who live longer than average.
Other committee witnesses stressed the need for a massive consumer education effort aimed at all age groups. Yet even if people had better knowledge, most agreed, the best retirement plans need to be tailored to very specific individual needs. So while simplified annuities with transparent pricing and fees are needed, the ways in which those products might be used by consumers are difficult to standardize.
"There is a big difference between financial knowledge and financial sophistication," said Ted Beck, President and CEO of the National Endowment for Financial Education. It has developed a web site called MyRetirementPaycheck that walks consumers through the many issues they need to resolve to successfully build a retirement program. The problem, he noted, is consumer interest and awareness. A great web site "is irrelevant if people don't use it."
Kelli Heuler, founder of the Hueler Companies, provides annuity investments to retirement plans. She thinks the problems with consumer understanding and acceptance of annuities can be overcome. She would offer low-cost annuities from multiple insurers. And she would let employees invest in annuities in flexible ways. One approach would be to let them buy annuities in increments over time, effectively "pensionizing" their savings in pieces.
And Lisa Mensah, executive director of the Aspen Institute's Initiative on Financial Security, would piggyback a voluntary private program of simplified annuities onto the Social Security sign-up process. When people became eligible to receive Social Security, she testified, they'd get an option to also invest up to $100,000 of their retirement funds into an annuity. Other witnesses thought that was an appealing idea in terms of its simplicity. But they worried that many people would need solutions that were tailored to their specific age, income, health, and family situations.
[See Annuity Buyers Seek Safety, Risk Guarantees.]