There are few guarantees in life, but Americans want and need to reduce some of the uncertainty of how to finance their old age.
"Not only must [investors] build up a sufficient nest egg during their working years, they must also have a source of steady income at retirement that is well-protected and lasts throughout their lifetime," says Rick Mason, president of corporate markets for ING U.S. Retirement.
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In response, a slowly rising number of companies are offering annuities as part of 401(k)s or other retirement plans. More firms may get a government nudge to keep up the trend.
There are different types of annuities but in general, they're investments shaped more like insurance; they pay a set or variable income stream in retirement, usually until death. Annuities typically bring the comfort that allows investors to keep a portion of their overall portfolio in more liquid and/or higher yielding assets.
But they can be a more expensive portion of any retirement plan and can tie up money that would otherwise be in the market working harder for investors. Critics make sure to label annuities as an insurance product, not an investment. Some observers note that adding annuities is a potential Band-aid fix for a bigger problem: Investors are generally way behind in their retirement savings.
Still, many benefits consultants see the inclusion of annuities as an important step in bridging fast-fading pension plans and 401(k)s. Improved longevity is making that equation more difficult, as are risk-management challenges.
Market volatility sparked by the 2008 U.S. financial crisis cranked up the pressure on the financial services industry and its regulators to respond with more income options. And a few had started in that direction when workplace consultancy Towers Watson conducted a 2010 survey. It found that about 2 out of 10 employers at that time offered annuities or planned to do so over the coming year or two.
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Getting easier? Costs and regulatory concerns limit some corporate participation in offering annuities as part of traditional 401(k) or other defined-contribution retirement plan.
Confusion, lack of flexibility, murky fee structures, and existing tax rules have proven prohibitive for some investors.
That all might change if proposed Treasury Department regulation is enacted. In early February, the Treasury advanced a proposal that would make it easier for employees to connect with annuity providers. The idea is to bring annuity planning into 401(k) education, and planning conducted through the workplace instead of outside financial planners or brokers. Increased competition among such plans and more pricing disclosure could also lower costs and allow more income brackets to participate. A related Labor Department rule also calls for more disclosure in 401(k) fee structure overall.
There's a push to think of "longevity insurance" as part of retirement planning. The Treasury is proposing the removal of a regulatory block to purchasing a deferred "longevity" annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income starting at an advanced age. This approach can potentially cost less than a conventional annuity and still satisfy spousal beneficiary protection rules. It should also, by design, last longer.
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