Why aren’t annuities in pension plans?

In my previous posts I commented how in a recent survey, people said they liked the benefits of an annuity, but if you used the word, annuity, people freaked out.

It appears the Department of Labor has the same opinion.  Over the last 2 days, the DOL hosted a hearing, “Lifetime Income Options For Participants And Beneficiaries In Retirement Plans”.  That is government speak for annuities and retirement plans.

A couple funny comments about this hearing.  The first is the number of comments from people: 779.  That is a huge number of comments from the public.  It is probably due to the concern that the government is going to take over people’s retirement plans, and in return only give them a 3% return on their retirement money.  This was a trial balloon floated by a college professor about the time Obama was voted President and while the idea was never seriously considered it has definitely scared the American public.  I’m constantly getting phone calls from people asking how to protect their IRAs from government confiscation.  The caller typically makes reference to what happened down in Argentina.

The other ironic aspect of the DOL’s concern for people to receive an income for life from their retirement plans is the DOL’s own rules have curtailed the use of annuities.  Back in 1995, the DOL issued regulations saying the retirement plan owners, “must take steps calculated to obtain the safest annuity available.

The challenge is if the retirement plan purchased an annuity, and something went south, the retirement plan could probably be on the hook according to this regulation. Well, since people are risk adverse, the people running the retirement plan didn’t want to generate liability and thus sharply curtailed the purchase of annuity products.

Before you say you don’t want to even discuss annuities, you really need to look at all the benefits the new breed of annuities offer.  sure they aren’t going to give you a 20% annual return, and yes the insurance is going to make money if they sell you one — why would they offer one otherwise — but they do offer fixed returns, guaranteed income for life, and in some cases pretty strong asset protection as well.