Ever since last winter, when the Obama White House seemed to endorse the idea of annuities as a 401(k) investment option, the money management and insurance industries have been ecstatic at the prospect of a captive market of millions of defined contribution plan participants.
First, in late January, the vice president’s Task Force on the Middle Class recommended “promoting the availability of annuities and other forms of guaranteed lifetime income.” Days later the Treasury and Labor departments jointly asked the investment industry for comments on “what steps to take to enhance retirement security for workers in employer-sponsored retirement plans through lifetime annuities or other arrangements.”
The grand finale of the Labor–Treasury outreach occurred last week, when some four dozen representatives from money management firms, insurance companies, trade and professional associations, law offices and employee organizations spent two full days at a rare dual-department hearing in Washington D.C., nearly all of them trying to persuade the feds that the concept of annuity-like products is a good one.
Several of the speakers think they succeeded.
The new “lifetime income” products are sold as a 401(k) investment choice — a low-return, low-risk option alongside the standard stock and bond funds. Investors would pay a premium to get a steady, lifelong stream of payments after retirement. At least a dozen major firms — including MetLife, Prudential, Putnam, AllianceBernstein, Great-West Life Assurance Co., and BlackRock — sell or are designing these products, and most of them sent speakers to the hearings.
The industry’s ultimate wish is for Washington to write safe-harbor rules so that plan sponsors won’t be liable if they offer a guaranteed product from the next AIG Group and that vendor goes kaput.
Of course, nothing so concrete was ever expected from this week’s meeting — and that nonexpectation was met. A Labor spokeswoman said her department would be rather busy evaluating the 800 (!) written and spoken comments it received before it decided what to do next.
Still, Mark Warshawsky, director of retirement research at consulting firm Towers Watson, says he and his colleagues noticed “a little bit of a change” in the attitude of the 18 Treasury and Labor officials just from day one to day two. “On the first day they were silent,” he notes. “On the second day they were asking questions like ‘Let’s assume if this safe harbor could be done, what would happen?’ There seemed to be a little more of a willingness to grapple with the issue.”
Prudential Retirement president Christine Marcks, who sat through four hours on the first day — and spoke about her firm’s guaranteed product, naturally — said that one government panelist went so far as to ask if there is a federal responsibility to provide some sort of guaranteed income product in 401(k) plans.
But even with the safest of harbors, it won’t be easy to move from hearings to profitable products. Annuities — and even products that avoid the A word but look, taste, sound, smell and feel like annuities — have never really worked in 401(k) plans.
Only 1 to 2 percent of people turn their 401(k) balances into annuities when they retire; the rest love the heft of taking a lump sum. The new crop of annuities-as-investment-options have been even slower to take off. For instance, Jody Strakosch, MetLife’s national director of retirement products, admitted last month that she was “a little surprised” that no plan sponsors had signed up for her firm’s guaranteed product tied to a target-date fund, even two and a half years after it was launched.
Investors may want security, especially in tough economic times. Nevertheless, after decades of marketing insisting that they can save untold riches in their 401(k)s and that stocks are their friends over the long term, investors feel cheated by the lower returns of annuities.
Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics Behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care and business ethics.
