Making Your Money Last
Help for Retirement Savings from Uncle Sam
The feds are doing what they can to keep the savings rate up and to get folks to preserve their nest egg after retirement.
October 21, 2009
Advertisement
Worried about your retirement? The government is, too. Treasury officials are planning steps to help make your savings grow and to guide you into investments that will provide income as you live.
Related Links
- On the Horizon: New 401(k) Investment Rules
- The DB(k): Pension of the Future
- The Retirement Security Project paper on automatic annuitization
- Employee Benefit Research Institute
For starters, the Internal Revenue Service is keeping limits on 401(k) contributions from dropping in 2010. The caps on tax free payroll deductions are indexed for inflation, which usually means that they increase each year. But because the inflation rate declined for part of 2009, the formula used to calculate plan limits called for those limits to drop. Rather than curtail the ability of people to save just as they are trying to rebuild battered retirement savings accounts, the IRS decided to leave the caps where they are.
For most workers, this means that for 2010 you can contribute up to $16,500 to a 401(k), 403(b) or similar defined contribution plan -- the same as in 2009. Those who turn 55 in 2010 will be permitted to put in a total of $22,000, because the so-called catch-up contribution limit of $5,500 allowed for 2009 also won’t change.
The government is also laying plans to push annuities. The feds want to encourage people to invest at least part of their 401(k) savings in annuities when they retire, so they can be assured of a steady stream of income for the rest of their lives. The Treasury Department wants employers to add “automatic annuitization” to 401(k) plans. The feature would require a portion of a worker’s lump sum 401(k) distribution made at retirement to be converted into an annuity unless he or she opts out.
Problem is, offering the annuity option is a hassle for employers because of current pension regulations, so Treasury is considering easing those rules. Eventually, for example, the department will clarify that the employer isn’t liable for lost retirement savings if an annuity provider goes belly up. If easing various rules doesn’t encourage enough companies to adopt the feature, Treasury will consider requiring that it be added to plans.
Getting folks to buy into the idea of annuities will probably still be an uphill battle, however, even if employers get on board. Studies show that workers usually prefer taking lump sum payouts of retirement savings and managing the funds themselves, even though they know there is no guarantee that they will be able to make the money last long enough. Experts say that one way around such reluctance would be to allow trial annuities: Putting some portion of the 401(k) distribution into an annuity that could be canceled after a set period of time, say one or two years. The thinking is that once account holders get used to that steady stream of income, they won’t bother unwinding the investment when they finally get the chance.
For weekly updates on topics to improve your business decisionmaking, click here.
Reader Comments (6)
Posted by: Bob at 10/22/2009 10:31:53 AM
More savings into a 401K sounds good but forcing people into annuities sounds really bad. When I retired I pulled my 401K and put it into an IRA because my employer was charging high fees and getting much poorer than average returns. I sure wouldn't want to let them handle an annuity for me. I wonder how many annuity lobbyists are pushing their friends in Congress and the Treasury for this scheme? That little comment in the article about concern that an annuity provider could go belly up says it all.
Posted by: Tex at 10/23/2009 08:59:36 AM
Bob is right. The current annuity industry would be the only beneficiary and the workers will be screwed. As an incentive for people to annuitize IRAs, there needs to be some insurance to back up the issuers obligation along the lines of FDIC and ERISA. That would stimulate SPIA. activity.
Posted by: Tom Veal at 10/31/2009 10:23:44 AM
The IRS did not "decide to leave the [401(k) contribution] caps where they are". The statutory rules for cost-of-living adjustments allow only increases in the caps, so there was no decision to be made.
Posted by: John at 10/31/2009 10:47:09 AM
Having a portion of retirement savings go into an annuity is the right decision for the majority of investors. The problem is trusting that the insurance company will be solvent during your lifetime. Just witness the current situation. Why not have the government issue annuities, just like they issue a variety of bonds? I would love to have my annuity backed by the full faith and credit of the United States of America instead of some insurance company. The annuity could be issued by a separate department within the Social Security administration. This would be a win-win proposition. The retiree would have piece of mind and probably receive a better rate than in the private sector and the government would be able to make money.
Posted by: Ron at 10/31/2009 12:06:00 PM
I presently hold several annuities with insurance companies. Although I am old enough to surrender them, I see no reason to do so. One annuity is currently paying me 6.10%. Try getting that return on your investment these days. The second annuity is more like a life insurance policy to me. Although it's sale value fluctuates with the market, it has a guaranteed death benefit that is 60% higher than the surrender value. If you have the correct product, it can work. Worry more about Uncle Sam spending your investments and taxing your employer! The current debt isn't helping my retirement at all!
Posted by: bill at 11/01/2009 03:58:11 AM
Consumer eduction & rights dealing with company run annuities plans: 1. most people do not understand them--could be another sub prime mortgage problem for consumers 2. many different types available---many plans have fine print 3. most done be insurance companies (same companies handling many HMO's-and have to show profits to their shareholders). 4. companies betting you won't live to the life expectancy tables and they take all your principle nothing for heirs! 5. companies handling IRAs for employees didn't always explain the plan or the fees so well 6. has to be oversight by employee committee reps so that employee has someone to go to when questions & problems arise w/plan from company