The Obama Administration’s desire to see greater utilization of guaranteed income products in 401(k) plans has been evident over the past year and a half.

This summer, on the day the White House hosted its once-a-decade conference on aging, the Department of Labor’s Employee Benefits Security Administration published a field assistance bulletin attempting to clarify 401(k) plan sponsors’ fiduciary obligations in selecting and monitoring lifetime income products offered to 401(k) participants.

The bulletin was a part of a broader initiative “designed to increase awareness and availability of lifetime income options in defined contribution plans,” according to a fact sheet the DOL released accompanying the White House’s conference.

In October 2014, the Department of Treasury and the IRS issued guidance “designed to expand the use of income annuities in 401(k) plans,” according to a release Treasury issued at the time. That guidance clarified that plan sponsors can include deferred income annuities in certain target-date funds used as qualified default investment alternatives.

In explaining the rationale behind the guidance, Treasury succinctly articulated annuities’ value proposition to pre-retirees and retirees as vehicles to help manage savings and ensure at least some of the assets accrued in 401(k) plans can be used to create regular income streams in retirement.

“As boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement,” said J. Mark Iwry, senior advisor to the Secretary of the Treasury and deputy assistant secretary for retirement and health policy.

In the guidance green-lighting annuities in 401(k) plans, both Treasury and Labor were sending a clear message: annuities can be an indispensable tool for improving retirees’ income security in what experts agree is a fundamentally insecure retirement landscape.

One of those experts is Mark Warshawsky. A Harvard Ph.D. and retirement wonk, Warshawsky has spent his career studying the country’s collective retirement prospects.

In 2006, he was working at the Treasury Department and played a central role in crafting the Pension Protection Act, which motivated the ascent of TDFs as sponsors’ favored QDIA option.

Earlier this year, Warshawsky published a paper testing the potential value for immediate annuities as a retirement income strategy, research he’s been exploring off and on for three decades.

“In the past, people were lucky,” Warshawsky said in an interview. “Stock markets went up, housing prices went up, government was providing more benefits through Medicare, and people had pensions. If you retired 10 or 20 years ago, you likely found yourself in a pretty good situation.”

Retirement savers enjoy much less certainty today, he noted.

“People need to be more sharp and efficient in dealing with longevity risk,” said Warshawsky.

His latest research compares immediate annuity strategies to the so-called Bengen rule, which calls for an annual 4 percent drawdown of 401(k) assets to adequately augment Social Security in retirement while ensuring that those savings last a lifetime.

As investors approach typical retirement age, Warashawsky’s research shows annuities produce higher average income three-fifths of the time compared to the 4 percent drawdown rule.

To date, annuities have not been a fixture in 401(k) plans. A Towers Watson survey released shortly after Treasury set a course for annuities in TDFs showed 12 percent of large and midsize sponsors offered them in their plan. Data from the Plan Sponsor Council of America puts the number at 8.5 percent for all plans.

The Towers survey cited lack of participant demand and sponsors’ fiduciary concerns as leading obstacles.

But there are signs that regulators’ recent encouragement is starting to take, at least in terms of addressing sponsors fiduciary concerns.

General Motors reportedly has added annuity options for its nearly 60,000 participants. And insurers and service providers are stepping up in response to both regulators’ encouragement of annuities and sponsors’ fiduciary concerns over them.

The Principal Financial Group recently rolled out its Principal Pension Builder product, which can be added to existing 401(k) menus, and gives participants the option of diverting a lump sum transfer or future deferrals to an income-generating deferred annuity.

Jerry Patterson, senior vice president of retirement and investor services at The Principal, said annuities are gaining more attention, and not just in the retail space.

“Regulators and 401(k) record keepers are looking closely at how annuities may play a bigger role in retirement security,” Patterson said.

More evidence is mounting that providers are responding to Treasury and the DOL’s effort to encourage wider adoption of in-plan annuities.

Still, roadblocks remain. A recent survey of wealth managers showed most advisors cited retirement income distribution planning as the chief objective for investors in their 50s and 60s. Yet only about a quarter of the advisors surveyed by Saybrus Partners said they were recommending annuity products.

Greater availability may spark increasing demand from participants, but likely not without encouragement from plan advisors, who serve as the lynchpin for educating sponsors and participants on the emerging trends that can best provide for a secure retirement.

Instant Insights /

Regulators pave way for guaranteed income products in 401(k)s

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