Over the past couple months, my twitter feed has been lighting up with warnings that the Obama Administration plans to confiscate your 401(k). You'd think the stock market's 25% drop from its 2007 peak, not to mention the suspension of matching contributions at scores of 401(k) sponsors, was apocalyptic enough to keep the conspiracy theorists busy. But apparently not. Friends, there's a new socialist plot against your wealth: The 401(k) annuity. Unfortunately for the paranoid fringe, it's actually a good idea.
The hysteria originates, it seems, with a February Department of Labor and Treasury Department request for comments on how 401(k) plans might be encouraged to offer annuities to 401(k) participants and how those participants might be persuaded to convert their 401(k) assets into a stream of lifetime income -- in other words, how to put some of their retirement money into annuities.
Why would Uncle Sam want to encourage such a thing? According to bloggers like this one, the Obama Administration is looking to lock up your money in annuity contracts from which you could not withdraw a penny, so that: a) bureaucrats could use it in a massive Ponzi scheme to pay down the budget deficit; or b) they could invest it in harebrained schemes designed to aid bleeding heart liberals' favorite interest groups, like c) unions; d) illegal aliens; or e) aliens.Actually, the document seems to expect that funds in 401(k) annuities would go to insurance companies, as is the case with regular annuities today. (Post AIG, you decide whether it might actually be smarter to give it to aliens.) And the reason that the Department of Labor thinks annuities should play a bigger role in retirement funding seems to be the same reason that most retirement experts do, including Steve Vernon, Kathy Kristof, Carla Fried, Jane Bryant Quinn and other experts on CBS MoneyWatch, as well as Hewitt Associates, TIAA-CREF and the Pension Research Council at The Wharton School.
- Annuities are the best way to insure that you don't outlive your money in retirement. The classic annuity promises a check for life as long as you live;
- Fixed annuities avoid the shock of stock market losses. The annuity provider promises to keep the checks coming regardless of the market's ups or downs;
- By locking up your money, an annuity protects you from grifters who prey on older seniors ;
- As 401(k) sponsors offer group annuities to their employees, the costs will be lower and the payouts higher than if you bought an individual annuity yourself; and
- Research shows that retirees who get a portion of their income from annuities are happier than other retirees.
The document asks 39 questions about the practicality of such things as offering annuities as a partial default option for retirees or of using other subtle methods to steer some of employees' money into annuities. That idea of a default upsets Tyler Durden of Zero Hedge, and some of the sources mentioned above have reservations about it, too. Annuities are not for everyone, to be sure. But it's not at all clear to me why an annuity default is worse than the current (and often only) default option- a lump sum, which leaves you to fend for yourself against all the risks of making your last money. In any event, you'd always retain the ability to opt out of the annuity if you wanted to manage your money yourself.
In fact, if you want to see what the DOL has in mind, you should consult New Behavioral Strategies for Expanding Lifetime Income in 401(k)s, a paper from the Retirement Security Project at the Brookings Institution. One of the co-authors is Mark Iwry, who just happened to land a job with Obama's Treasury Department as Deputy Assistant Secretary for Retirement and Health Benefits. His signature is at the bottom of the request for comments that started the whole Twitter panic. He's a more reliable source on what's on Uncle Sam's mind than the paranoid fringe.
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