While offering an annuity as a distribution option through the plan seems to make sense, it is unlikely that sponsors will move in that direction. “I don’t think you’ll see annuitization out of plans until the regulatory regime changes,” says David Wray, President of the Profit Sharing/401K Council of America in Chicago.
When annuities are offered through the plan, explains Wray, current rules and regulations make them undesirable to most participants. Annuities purchased through the plan must meet the Joint and Survivor regime and have gender-neutral pricing—making them undesirable to men. Men have shorter life-spans, explains Wray, so annuity pricing for them is cheaper outside the plan.
Additionally, says Wray, when annuities are a defined contribution plan distribution option, it has to be all or nothing; either 100% of defined contribution assets must go to the annuity purchase, or nothing. Few participants want to annuitize their entire benefit, says Wray. Those who are 65 could live to be 85, so they need to stay invested in equities to retain purchasing power and not annuitize their entire account.
Another factor that makes sponsors hesitant to offer annuities, says Wray, is the liability issue. When employers choose an insurance company to offer annuities to their employees, he explains, they are exposing the organization to liability should that insurance company go out of business, leaving employees’ annuity contracts worthless.
Elayne Robertson Demby