Treasury Proposals Pave Way for Offering Lifetime Income Options

These flexible “lifetime income” options can provide greater certainty in retirement and minimize the risk of retirees outliving or underutilizing their retirement savings.

“When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings. Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security,” said Treasury Secretary Tim Geithner.

The guidance package issued by the Treasury Department builds on comments received in response to the Departments of the Treasury and Labor’s joint request for information on the desirability and availability of lifetime income alternatives in retirement plans. The package will help Americans meet their need for income during retirement by:

•  Encouraging Partial Annuity Options. Retirement plan participants are often confronted with a “cash or annuity” decision upon retirement. Given an all-or-nothing choice, many opt for a lump sum and decline the lifetime income stream because they are unaware they have the option to combine approaches. The proposed regulation changes a regulatory requirement to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment. This is designed to encourage more retirees to consider partial annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.

•  Removing a Key Obstacle to “Longevity” Annuities. Another proposed regulation expands on the combination approach by removing a regulatory impediment to purchasing a deferred “longevity” annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy. Annuities of this type would provide an efficient way for 65- or 70-year-olds (or even younger savers) to address the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85. Once that risk is addressed, a retiree’s task of generating income from the remaining assets is more manageable because it is limited to a fixed period of time.

•  Clarifying Rules for Plan Rollovers to Purchase Annuities and Spousal Protection Rules for 401(k) Deferred Annuities. Two revenue rulings issued Thursday clarify how rules protecting employees and spouses apply when plan sponsors offer lifetime income options under their plans. The first ruling clarifies how the rules apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer’s defined benefit pension plan. The second ruling clarifies that employers can offer their employees the option to use 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens. Both of these rulings would facilitate the availability of flexible options for employees so that they can better use their 401(k) savings to achieve financial security in retirement.

Additional information on these proposals is available in a fact sheet posted on Treasury.gov. The proposed regulations announced are also available at Regulations.gov for public comment.