On "Retiree Annuities May Be Promoted by Obama Aides" by Theo Francis
Original Article by Mr. Francis:
Mr. Francis reports that "The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged." The effort to seek public comment is being led by Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry.
Rick Santelli from the CME comments on CNBC as to what the move means: "Instead of a bit of your paycheck going into equities every week, it will probably be going into things like Treasuries it would be a little bit lower return but it would be safer." With respect to Mr. Santelli's observation, we believe the Ms. Borzi and Mr. Iwry are interested in encouraging income streams for retired workers, and not terribly interested in controlling the accumulated income source. Fixed annuities, for instance, are tied to equities index performance, not treasuries market index performance.
John Brennan, Vanguard CEO, criticized annuities as often expensive and offering little inflation protection. One can assume that the annuity prices will decline if the initiative takes hold, due to sales volume alone. Additionally, a fixed annuity is actually a good hedge against inflation. See my previous post on the subject: http://www.learnhowtoretire.com/blog/2009/07/13/calculating-how-much-you-will-need-in-retirement-facing-inflation/
Citing the 31% average drop in retirement fund balance during the recent market plummet, Borzi is quoted as saying there is “a tremendous amount of interest in the White House” retirement security initiatives. Though there has been a terrific market bounce back since March 2009, the economy is still weak, unemployment is over ten percent nationally, and many experts think the other shoe is about to drop: an explosion of mortgage foreclosures (the root cause for the market drop) this year that will be greater than the recent batch.
The article cites reports from the Retirement Security Project (7/2009), which found that only 2% of 401(k) plan participants convert retirement savings into an annuity on retirement, and from Watson Wyatt Worldwide that about 22 percent of employers with retirement savings plans offered retirees the choice between an annuity and a lump-sum distribution. It seems pretty clear that the administration is interested in addressing the risk of individual's exhausting lump-sum benefit payouts by encouraging workers to consider income streams as an alternative.
Viewpoint:
This measure is an attempt to shed more light on the annuity option, so that workers can have enough income in old age. In this context, it only a mechanism to guarantee individual workers will not outlive their savings. I see it as an opportunity for individuals to convert their funds to fixed annuities, to take part in market gains, to hedge against inflation and to remove market volitity as a retirement savings factor.
Reducing one's risk and protecting one's principal has got to be job number one in this environment. It is critical that savers find a trusted advisor to discuss this matter with. I think it is crucial that this advisor be be an independent representative. One whose primary job i s your financial security and who is not bound to sell you a single company's product. To find someone in your neighborhood click here.
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