Annuity

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Insurers press U.S. to allow annuities in pension plans

It should be easier for employers to include annuities in their retirement plans because Americans are at risk of outliving their savings, an insurer told Labor and Treasury department officials today.

The government should extend and clarify “safe harbor” protection, which exempts employers from liability, so they can add annuities as an option in 401(k) retirement plans, said Christine Marcks, president of retirement at Prudential Financial Inc., based in Newark, New Jersey, at a hearing in Washington. Annuities also should be permitted as a default investment, Marcks said.

“Some plan sponsors decline to consider offering guaranteed lifetime-income solutions because of a mistaken belief they'll have fiduciary liability if the insurer's financial strength deteriorates in the future,” Marcks said.

The two-day hearing, which began today, follows a request for comment from the Labor and Treasury departments that drew almost 800 letters on the issue of lifetime income.

Employers have been reluctant to adopt annuities because of concerns about fees and potential liabilities in picking the insurers. Annuities are insurance contracts that guarantee payments in exchange for upfront payments.

“We have to solve the fiduciary issue first,” said David Wray, president of the Profit Sharing/401k Council of America, a Chicago-based nonprofit representing 1,200 companies with 401(k) plans, at the hearing. “Employers want to know: Is my company guaranteeing this payment for the next 30 years? Am I going to get sued?”

Living Longer

Regulators and legislators are looking at Americans' retirement security because life expectancies are increasing and savings have shifted from traditional pension plans -- where employers generally provide retired employees with lifetime payments -- to defined contribution plans such as 401(k)s, according to the Labor Department. Participants in defined contribution plans increased to 67 million in 2007 from 11 million in 1975, the agency said.

An estimated 47 percent of Americans born between 1948 and 1954 may not be able to afford basic expenses and uninsured health-care costs through retirement, according to the Employee Benefit Research Institute, which is based in Washington.

Employers are also concerned about fees and how guarantees would be transferred if employees change jobs, said Wray at the hearing today. Last year, 4 percent of employers offered a 401(k) plan with an annuity built in, according to Lori Lucas, defined contribution practice leader at Callan Associates Inc., a San Francisco-based investment-consulting firm.

Prudential and New York-based insurer MetLife Inc., the two largest U.S. insurers, and money managers including BlackRock Inc., based in New York, have been developing investment options that let workers contribute to an annuity within their 401(k)s.

IRA Option

Vanguard Group Inc., a mutual-fund firm based in Valley Forge, Pennsylvania, said income guarantees should be designed to compliment IRAs, according to Linda Wolohan, a spokeswoman for the company, in an e-mail. That's because more than 80 percent of Vanguard's participants who are over age 60 exit their employers' 401(k) plan within three years of leaving a job, Wolohan said.

One pending bill, introduced in December by Senators Jeff Bingaman, a New Mexico Democrat, Johnny Isakson, a Georgia Republican, and Herb Kohl, a Wisconsin Democrat, would require corporate retirement plan sponsors to disclose how much monthly income employees' portfolios would generate in retirement.

Vanguard to offer web tool to compare annuities

Annuities are one of the last product areas that the Internet has yet to tame.

As more than one expert pointed out to me, you can now comparison-shop online for just about every product and service, from cars to vacation spots.

So experts and analysts to whom I spoke all applauded the announcement made by The Vanguard Group Inc. last Thursday introducing Vanguard Annuity Access, a web-based service that enables individuals to compare income annuities from leading insurance companies and obtain customized quotes on a real-time basis. Developed in partnership with Hueler Cos., it is powered by Hueler's Income Solutions platform.

In a nutshell, the service is being offered as a way for Vanguard retirement plan participants to evaluate competitively priced, directly comparable fixed-annuity contracts from multiple insurance companies.

This allows Vanguard to maintain relationships with these consumers. As Vanguard noted in its press release, 80% of new retirees end up leaving their employer's plan within three years, typically for a rollover individual retirement account.

Vanguard has not reinvented the wheel with Annuity Access. A key differentiator be-tween the Vanguard implementation and the ways in which other companies and sites have approached comparison-shopping tools for insurance products is that there is no “pay to play” allowed on the Income Solutions platform.

“We are completely independent,” explained Kelli Hueler, chief executive of Hueler.

“A complete examination of the financial metrics behind the annuity goes into our comparisons,” she said. In addition to an institutionally priced product and contract structure that are appropriate for the individual, the system takes into account insurers' ratings and other data, as well as a company's ability to serve the individual, she said.

“Another key thing is the disclosure — full disclosure — of fees, and for us, that is a 2% transaction fee. Most programs just don't disclose that; [with Vanguard] it is right out front where it should be,” she said.

That fee, which is divided between Vanguard and Hueler, includes all the platform costs, the administrative costs of the program and the services provided to individuals, which includes guidance by certified financial planners.

It is this latter point that is really the sole concern of some analysts.

“This is a really complex area, one where the average person is going to need a lot of help,” said Sean Cunniff, research director at The Tower Group Inc., a research and advisory services firm that covers exclusively the financial services industry.

Mr. Cunniff, who was a broker and who now has his CFP certificate, emphasized that while Vanguard is offering one of the best such platforms he has seen, the question mark remains the human element.

“I had looked at the Hueler platform in the past, and they did a really good job putting it together from a technology perspective, but the real hurdle remains how Vanguard handles the advice problem,” he said.

He explained that there are a multitude of questions around in-puts and hypothetical situations that the tool itself can't address.

The Vanguard Financial Plan service provided by many retirement plan sponsors does provide individuals with free access to a CFP, but the Annuity Access tool represents an additional service.

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