Annuities and the New Regulations

Beginning in 2010 the Departments of Treasury and Labor jointly initiated a project to identify regulatory changes that would result in greater use of income annuities by participants in employer sponsor defined contribution plans. PSCA was active in providing input and I testified at a joint Department of Labor Department of Treasury hearing on September 14, 2010. Last week the Department of Treasury issued the first of what will be a number of regulatory changes resulting from this joint Department of Labor/Department of Treasury effort.
The announced changes designed to encourage the use of annuities by 401(k) participants are laudatory, especially the changes affecting longevity insurance. However, plan sponsors have fiduciary liability if they provide annuities through their plans. As fiduciaries they must select a specific company to deliver plan provided annuities. The sponsor remains responsible for that decision for as long as a single participant is a beneficiary of a contract with a selected insurance company. In other words the sponsor is on the hook for a ninety year old getting an annuity payment from an issuer the plan dropped 10 years ago. This is very different from the exposure when selecting an investment fund for a plan. In that case if the fund underperforms it can be immediately replaced. Once a participant buys an income annuity it is for life.
Until the liability for the selection of the annuity providing insurance company is mitigated most defined contribution plan sponsors will continue not offering annuities as either a plan investment or plan distribution option. Annuitization will continue to occur after participants have rolled their plan distributions into an IRA.