Retirement Income Language Barrier Remains a Problem

Despite the generally positive perceptions of the benefits of guaranteed lifetime income, only one in four survey respondents age 45 and up plan to purchase an annuity. 

A new study released today by the Insured Retirement Institute (IRI), “The Language of Retirement 2017: Advisor and Consumer Attitudes Toward Securing Income in Retirement,” reveals most Americans say they “favor financial strategies that offer guaranteed lifetime income.”

However, this group is largely unaware that annuities can provide this feature.

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“While 75% of all consumers surveyed said they were familiar with annuities, less than half understood an annuity can provide lifetime income,” warns Cathy Weatherford, president and chief executive officer of IRI. “This study is a critical step toward understanding how future generations plan to save for retirement.”

The study was conducted jointly by Jackson National Life Insurance Company and the IRI, showing more than 80% of advisers say that guaranteed lifetime income product features have had a positive impact for their clients. One-third say it is “the most impactful feature of annuities.”

“Further, a whopping 90% of all consumers who responded, and 95% of those 35 to 44 years old, are very or somewhat interested in receiving lifetime income,” Weatherford notes. And yet the number of Americans actually planning to purchase annuities remains perplexingly low.

“This disconnect is devastating to American savers and the advisers who are trying to serve the best interests of their clients,” observes Barry Stowe, chairman and chief executive officer of the North American Business Unit of Prudential plc, Jackson’s parent company. “Retirees need guarantees to protect their lifetime income and our research proves people want this benefit. It’s our job to educate Americans and ensure they know annuities are designed to prevent consumers from outliving their income so they can live the retirement they want.”

According to the firms, more than half of the financial professionals surveyed believe at least some of their clients who do not own annuities will run out of money during retirement.

“More strikingly, the study also found more than half of advisers had clients who managed to completely exhaust their financial resources,” Weatherford says. “Nearly one-third of the advisers have had this happen to three or more clients. The primary factors cited by the advisers for this were overspending and health care costs.”

NEXT: What is limiting the use of annuities? 

According to the study, many advisers indicated there are specific challenges that limit the use of annuities.

“Of advisers who responded, 61% believe negative client perceptions of annuities present a barrier, and almost half of advisers say their clients believe annuities are too expensive,” Stowe says. “Yet when advisers described features of annuities in isolation—without referring to the products by name—consumers expressed strong interest.”

Taking this lesson to heart, Emilio Pardo, chief marketing and communications officer for Jackson, says it has become “more critical than ever that our industry overcomes the existing bias toward annuities, simplifies the language used to describe them and increases the overall understanding of the power of a well-structured modern annuity so Americans will be more receptive to using them to reach their financial goals.”

Other findings show younger consumers tend to express greater interest in the income features annuities provide compared to older respondents—yet older people tend to own more annuities. Adding to the complexity, fully eight in 10 consumers say they “do not believe Social Security alone will provide them with sufficient income in retirement,” and only 21% of consumers “expect a pension to provide them with significant retirement income.”

Weatherford concludes it is “particularly alarming that the study found half of consumers plan to regularly withdraw money from their retirement savings to cover basic and discretionary spending, an approach that carries a high risk of depleting assets, especially among those who live longer.”

The full study is available for download here

Regulators Provide Relief for Hurricane Irma Victims

Loan and hardship rules, in addition to reporting requirements, have been relaxed.

The Internal Revenue Service (IRS) announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. This is similar to relief provided last month to victims of Hurricane Harvey.

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

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Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster areas affected by Hurricane Irma and designated for individual assistance by the Federal Emergency Management Agency (FEMA). For a complete list of eligible localities, visit https://www.fema.gov/disasters. To qualify for this relief, hardship withdrawals must be made by January 31, 2018.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a victim of Hurricane Irma to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in Announcement 2017-13.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less.  Under current law, hardship distributions are generally taxable and subject to a 10% early-withdrawal tax.

In addition, in IRS Notice 2017-49, the IRS, the Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC) announced relief similar to and in addition to that already provided to Hurricane Harvey and Hurricane Irma victims.

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