A benefits law specialist who once served on the Internal Revenue Service employee benefits legal team is making the case for building annuities into all 401(k) plans.
Andrew Stumpff Morrison — who is a former Davis Polk partner and a former University of Michigan law school lecturer — has proposed in a new working paper that the Internal Revenue Code should be amended to require that 3% of the annual plan contributions made on behalf of a participant should be used by the year's end to buy a vested, standard deferred annuity for the participant.
A working paper as an academic paper that has not yet been through a full peer review process.
Stumpff Morrison described a "standard deferred annuity" as a "commercial contract for a single-life fixed annuity whose payout begins if and when the annuitant (plan participant) reaches age 85."
Stumpff Morrison would exclude the annuity contracts from the plan account balance.
An illustration in the paper suggests that, for a worker who had $5,000 in annual plan contributions from all sources from ages 25 through 65, the plan could end up with $742,537 in assets and guaranteed annual income of $16,604 at age 85.
The mandatory in-plan annuity strategy would protect retirement savers from the problem that knowing how long any given retiree will live is impossible, Stumpff Morrison said.
"The question of 'what you can afford to spend' from a lump-sum-denominated resource cannot be well-answered, even approximately," he said.
Common strategies for determining how long a retiree might live and how much the retiree can spend "will confer on the retiree a high chance of dying with most retirement savings fully intact, yet at the same time a non-zero chance of living sufficiently long as to run out of money while still alive," he said. "Averages cannot help an individual identify where on the long probability-distribution curve their own death will fall, and an individual can have no idea whether it will turn out to have been profligate or hyper-conservative to draw down at a given pace the balance of their lump sum."
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