408(b)(2) & New Annuity Rules for 401(k)s
In 2010, the Department of Labor had issued preliminary rules about 401(k) fee disclosures. On February 2, 2012 the Department of Labor issued the long-anticipated final fee disclosure regulations for 408(b)(2) which require services providers in retirement plans to make available written disclosure of their services and fees. What’s surprising is that 2 days after the release of these final fee disclosure regulations, the Treasury Department releases information in support of, “Annuitizing Your 401k”.
The irony of it all is that annuities have been known for their bundling and excessive, hidden fees. Wrap fees, surrender charges, management fees, as well as mortality and expense fees can make an annuity quite expensive. The structure of these products alone can make it almost impossible to uncover their true costs, yet this is the type or product that the Treasury Department proposes? Makes me wonder if this is some sort of compromise considering the size and influence of the insurance industry on our government?
The new proposal addresses partial annuities. The Treasury’s proposals are looking to make it simpler for retirees to purchase annuities with some of their retirement savings, while retaining the rest as a lump sum for other purposes.
Longevity annuities are also an option and are generally less expensive than immediate annuities because the monthly payments don’t start until late in your retirement, perhaps at age 80 or 85, so that you will have money in your later years in case you live that long. “Because longevity annuities typically are purchased at or near retirement, but do not begin paying benefits until considerably later, they can be offered at a fraction of the cost of annuities that pay immediate benefits,” according to a report by the Council of Economic Advisers.
Employees would also be allowed to use their 401(k) plan payout to obtain a low-cost annuity from their employer’s traditional pension plan. “If the employer sponsors both a 401(k) and a defined benefit plan the ruling provides an opportunity to roll over or transfer some of the benefit to the defined benefit plan,” according to a Treasury official.
Lastly, spousal benefits were also addressed. “A revenue ruling also resolved uncertainty about how 401(k) rules that protect spouses' benefits apply when an employee chooses a deferred annuity. Under the rules, a worker who elected a single-life annuity—one with a benefit that would end when the worker dies, rather than continuing for the surviving spouse—has to get his or her spouse's written consent. The ruling spells out terms that don't require spousal consent until the annuity begins, at which point the insurer issuing the annuity, rather than the employer plan, would handle it, according to a Treasury fact sheet”.
Aside from the very apparent excessive fee issue regarding annuities in 401k plans, who will be responsible for selecting and monitoring these products? Plan sponsors will have their hands full keeping up with 408(b)2 as it stands. The addition of annuities can make it even more difficult for plan sponsors to ensure that reasonable fees are being charged for reasonable services. It all seems quite contradictory!
About Charles Massimo
Recognized as industry expert and guest speaker at national industry conferences, Charles Massimo is a published author and media subject expert on topics ranging from wealth/asset management to investment and financial planning for high net worth families.