Don’t be surprised if annuities start popping up in your 401(k) plan.
Last week, the U.S. Treasury Department proposed regulations designed to make it easier for 401(k) and other defined contribution plans to offer annuities to employees, saying such a move would improve the financial security of millions of Americans who are saving for retirement.
One Treasury proposal would make it easier for 401(k)-type plans to offer so-called longevity annuities. By delaying income payments until later in life—for example, age 80 or 85—these can offer a relatively low-cost way to purchase a guaranteed income stream at age 60 or 65. The proposal would give these annuities “special relief” from Internal Revenue Service rules that require those in 401(k)-type defined-contribution plans to start taking taxable withdrawals at age 70½. To qualify for special relief, the policy has to meet certain conditions, including costing no more than 25% of the account balance and beginning an income stream by age 85.
Treasury also cleared up uncertainty about when a spouse has to give consent for a 401(k) owner to purchase a deferred annuity. (Deferred annuities issue payments in the future.) The new ruling applies to those who elect a “single life” annuity–or one with payments that end when the purchaser dies, rather than continuing for his or her spouse’s lifetime, as well. Under the new rule, an employee who purchases a single life annuity in a 401(k) plan must get his or her spouse’s written consent at the time when the annuity begins, rather than upon purchase. Since many 401(k) plans allow employees to purchase annuities over time, this removes a potential procedural hassle.
Already, a number of financial services companies have been experimenting with adding annuities to 401(k) plans.
Amid concerns that workers will run out of money during retirement, firms including BlackRock Inc., Prudential Financial Inc. and UBS AG are adding insurance-based annuities, which generate steady, guaranteed payouts, to the target-date mutual funds that have become so popular in recent years.