The beloved annuity Gets a hug from Obama

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Annuities: The official retirement vehicle of the Obama administration.

As slogans go, it’s hardly “Keep Hope Alive,” or even “Change We Can Believe In.”

But there were annuities, in a report from the administration’s Middle Class Task Force that came out this week. They are among the tools the administration is promoting as it tries to give Americans a better shot at a more secure retirement.

At its simplest, which is how the White House seems to want to keep it, an annuity is something you buy with a large pile of cash in exchange for a monthly check for the rest of your life.

If the biggest risk in retirement is running out of money, an annuity can help guarantee that you won’t. In effect, it allows you to buy the pension that your employer has probably stopped offering, and it can help pick up where Social Security leaves off.

President Obama did not discuss annuities in his State of the Union address on Wednesday night, probably figuring that viewers had enough problems staying awake. But the mere mention of them by the task force was enough to send executives at the insurance companies that sell the products into paroxysms of glee.

“I never thought I’d have the president as a wholesaler for us,” said Christopher O. Blunt, executive vice president of retirement income security at the New York Life Insurance Company. “This is awesome. I’m trying to see if I can get him to do a big broker meeting for us.”

He’s unlikely to turn up for such an event just yet. After all, the announcement from the White House did make it clear that the administration was looking to promote “annuities and other forms of guaranteed lifetime income.” That suggests the administration is open to other solutions, though there are not many others that are as simple as the basic fixed immediate annuity (also known as a single premium immediate annuity) that delivers a regular check for life.

Still, all of this attention from the president is a stunning turn of events for a rather unloved product. Many consumers reflexively run in fear when salesmen turn up pitching high-cost and complex variable annuities, which evolved from their simpler siblings decades ago. Today, the Securities and Exchange Commission maintains an extensive warning document on its Web site for investors considering the variable variety.

Meanwhile, almost all employees on the precipice of retirement who have access to annuities as a payout option steer clear when their companies offer them. While various surveys show that roughly 15 to 25 percent of corporations offer annuities to workers who are retiring, including big employers like I.B.M., a 2009 Hewitt Associates study reported that just 1 percent of workers actually bought one.

“I joke sometimes that we’re the best ice hockey players in Ecuador,” said Mr. Blunt of New York Life, which sells more fixed annuities than any other company, according to Limra, a research firm that tracks the industry.

So what are these soon-to-be retirees so afraid of? And what makes the White House so sure it can change their minds?

Let’s start with the fears. Early on, the knock on annuities was that once you died, the money was gone. So let’s say a 65-year-old man in Illinois turned over $100,000 in exchange for $632 a month for life, a recent quote from immediateannuities.com. If he died at 67, his heirs would get nothing while he would have collected only about $15,000. (On the other hand, it would take him until age 78 to get $100,000 back, but that doesn’t take inflation into account.)

The industry solved this by coming up with variations on the policy, allowing people to include a spouse in the annuity or guarantee that payouts to beneficiaries would last at least 10 or 20 years. This costs extra, of course, meaning your monthly payment is lower.

Others worried about inflation, so now there are annuities whose payments rise a few percentage points each year or are pegged to the Consumer Price Index. These cost extra, too (often a lot extra).

You see the pattern here. Every time someone had an objection — the need for a bunch of payments at once, a lump sum in an emergency or concern about rising interest rates — the industry created a rider to add to policies to make the concern go away (and make the monthly payment smaller).

Besides, people need to have saved enough to purchase a decent monthly annuity payout in the first place. But plenty of retirees haven’t been saving in a 401(k) or individual retirement account long enough to have a good-size lump sum.

There are also stockbrokers and financial planners standing in the way. Once money goes into an annuity, they can’t earn commissions from trading it anymore and may not be able to charge fees for managing it. Financial advisers have a charming term for this phenomenon — annuicide. You insure, and their revenue dies. So, many of them will try to talk you out of it.

One reasonable point they might make is that insurance companies can die, leaving your annuity worthless. State guaranty agencies exist, but they may cover only $100,000 to $500,000. I’ve linked to a list of the agencies in the Web version of this column so you can see what they insure.

Even if you get over all these mental hurdles, however, the hardest one may be the difficulty of seeing a big number suddenly turn small.

“It’s the wealth illusion, the sense that my 401(k) account balance is the largest wad of dollars I’ll ever see in my lifetime, and I feel pretty good about having that,” said J. Mark Iwry, senior adviser to the secretary and deputy assistant secretary for retirement and health policy for the Treasury Department. “Meanwhile, I feel pretty bad about the seemingly small amount of annuity income that large balance would purchase and about the prospect of handing it over to an entity that will keep it all if I’m hit by the proverbial bus after walking out of their office.” So how might the Obama administration solve this? It could get behind a Senate bill that would require retirement plan administrators to give account holders an annual estimate of what sort of annuity check their savings would buy. That way, people would get used to thinking about their lump sum as a monthly stream.

Tax incentives could help, too. A recent House bill called for waiving 50 percent of the taxes on the first $10,000 in annuity payouts each year. “If this is behavior that the administration is trying to inspire, then it’s not that long of a leap to think that maybe they’ll start to promote some version of these bills,” said Craig Hemke, president of BuyaPension.com, which sells basic annuities (and offers some good educational material for people who are trying to learn about the products).

Mr. Iwry, who is one of the intellectual architects of the administration’s examination of annuities, wouldn’t say much about what might happen next. But one paper he co-wrote two years ago suggests a clue.

As the treatise suggests, the administration could nudge employers into automatically depositing, say, half of new retirees’ lump sums into a basic annuity or other lifetime income product, unless they opt out. Then, they could test the thing out for two years and see how that monthly paycheck felt. If they liked it, they could keep the annuity. If not, they could cancel it without penalty and get the rest of their money back.

Annuities won’t be right for everyone (people in poor health should probably steer clear). And they’re not right for everything because it rarely makes sense to put all of your money in a single product or investment.

You could, for instance, use an annuity to cover the basic expenses that your Social Security check doesn’t cover. You might also use the money to buy long-term care insurance, which would keep nursing home bills from becoming a budget-destroyer.

But the president has one thing right: The basic annuity is almost certainly underused. Sure, you may be able to arrange a better income stream on your own, but not without a lot of help from a financial planner or a lot of time managing it yourself. Then there’s the possibility, however small, that you’ll spend too much in spite of yourself or run into a once-in-a-generation market event that will cause you to run out of money sooner than you expected.

All of that makes basic annuities the ultimate test of risk aversion. If you buy some, you and your heirs may have less money than if you’d kept your retirement savings in investments. Then again, if you guarantee enough of your retirement income, you — and those same heirs — won’t have to worry about how you’re going to meet your basic needs.

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Some 401 Plans are added an Option of annuity

Their idea is that these products can promise employees a traditional pension security, while freeing up the task to pay for her employers. However, they are still difficulty breaking A barrier.

Only 2% of the plans 401 include a kind of pension or an option of insurance as an investment alongside standard stock choice and the guarantee fund, according to Hewitt Associates, a benefits consulting firm in Lincolnshire, Ill. An additional 3 percent are "very likely" and 17% are "unlikely" to add the category this year, Hewitt said.

Proponents hope that the hearings this week, sponsored by the Treasury and the ministries of labour, will lead to federal regulations that clarify some of the administrative concerns.

"Most people would like to, as they approach the age 50, to have a certain logic of what income level, they would have retired," said Thomas j. Fontaine, global head of the assessments defined in the investment management firm AllianceBernstein, one of the most half-dozen insurance companies and fund managers design these products. "And they will want to know that they will have the income to life."

The products work in two ways. The most common varieties are related to the date funds target - pre-mixed funds which based their strategy of investment on the date, the employee wishes to take his retirement by automatically changing the mixture as the date approaches draws.

In the model of AllianceBernstein, a growing part of the assets of the deadline are transferred to a fund special guarantee begins at the age of 50, 100% in this Fund by five years prior to the date of retirement. Although the product is not complete, Mr. Fontaine said he only expected to ensure a 5% rate of return for life, for an amount of approximately 1% of the assets.

Prudential retirement has a product that combines a variable annuity with a date Fund group target, essentially ensuring against the slowdown of the market, for an amount of 1 per cent. It ensures that each year for the first 20 years of retirement, the investor may withdraw an amount equal to 5% of the assets which were in the Fund of the deadline in its largest year, even if the market has collapsed the year before retirement. After 20 years, Prudential began to pay 5%.

MetLife Personal Pension Builder takes a totally different approach, akin to a deferred fixed annuity. Whenever someone makes a contribution of 401, all or part of money essentially buy a mini-annuity (also known as the phased rent), obtain the interest rate prevailing at the time. Thus, a person who contributed at least every two weeks may be purchase 26 mini-rentes this year.

All these products have in common, is that employees use their assets from 401 to buy guaranteed, constant payment for the rest of their lives after retirement. The cost is usually about 1% of the assets secured, expenses regular 401.

For many people, the added security is worth the price.

"We assure all - disability, our car, our home - but we do not ensure the risk that we might survive our assets,"says Pamela Hess, Director of retirement research Hewitt."." It recommended that people use this kind of security for about half of their 401 property.

There are other concerns, however. Because so many parties are mobile, including the interest rate, the date of retirement and the amount of the contribution - companies worry about the administrative difficulties. It is not simple to have a force work together small-company stock fund.

As a standard annuity, some of the new products depend on a single insurance company remaining in business long enough to continue to pay on guarantees, perhaps for decades.

"How fix you this if it is not the right provider? (A) asked Ms. Hess.

Jody Strakosch, Director of MetLife retirement at the United States products, has a ready answer for this kind of criticism: "MetLife will meet our financial obligations for 140 years."

And John Kalamarides, senior vice president of strategies and retirement solutions at Prudential, said new rules "safe harbor" Washington could relieve the fiduciary concerns of some employers in the choice of insurance companies.

Side, the date of target products are more flexible than annuities. Investors can withdraw their money at any time, even if it means that they paid the additional fee for nothing.

Tongue companies these products say demand is growing. In a survey of 1,300 companies last fall, MetLife found that 44% of employees "want my employer to offer an annuity option" in their open or similar retirement. A spokesman for MetLife recognized that the Declaration may designate rolling on the 401 to an annuity at retirement, as well as to have an investment option.

Stephen P. Utkus, who heads the Center for research of the retirement of the vanguard group - which does not sell any of these new products - said that trying to buy security 401 investment was a mistake. The best approach, he said, is simply to build a bigger nest egg.

"Our customers see having a portfolio itself as a form of security," he said.

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With a gift annuity, which comes with a rate of return

Is this? Or is there a catch? The answer to these two questions is not. But the issues are simplistic.

Better ask yourself the question: "I want to support charity?" and "is a gift annuity choice for me." If you answer with a Yes, then you need to assess your finances and understand what are the charitable gift annuities, and how they work.

"Some people assume it is as a bank account," said Avery e. Neumark, a retirement expert and a partner in the accounting firm Rosen Seymour Shapss Martin & Company New York. "But it is not." It's just what the name — a gift. You give is the main, and you get a guaranteed lifetime income. You cannot compare with the rate of monetary market of today. The disadvantage is that you are locked in. »

Rates, which further annual inflation rates now exceed 1.1 per cent, may seem low years now if inflation heats up.

To be a wise choice, said Mr. Neumark, persons must generally approaching retirement and charitably inclined, have liquid assets, and other income and other needs is supported. "I had a client who did very well," he said. "He was 90 years, the rate was very high, and he has lived up to what he was 103".

The American Council on gift annuities defines the product as a contract under which a charitable organization, in exchange for a donation of money or property, undertakes to pay a fixed term one or two lives, usually donors '. Most reputable charitable organizations use the rates recommended by the Council, that vary according to the age of the annuitants and if there is one or two. Because of the charity, there are tax benefits.

For a simple life, the last rate table called for a 55 years old receive 5% a year, a 60 years 5.2 percent, a 5.5% 65, 70 years 5.8 per cent, an 80-year-old 7.2% and someone 90 or more 9.5 per cent.

Potential donors can calculate their own rates and tax benefits on the Web site: pcalc.ptec.com/hosts/989357365/CGA. For a donation of $100 000 covering a person 65 years and another aged 62 annuity calculator site showed an immediate tax deduction of $12,179.50 and an annual annuity of $5,000. Of the latter, $3,326.53 would be non-taxable because it represented a return of principal and $ 1,673.47 would be taxed as ordinary income.

After 26.4 years, common life expectancy, all payments would be taxed as ordinary income.

Conrad Teitell, a lawyer in Stamford, Connecticut, who represents the Council and a number of leading charities, said donors could donate appreciated assets and avoid the immediate payment of capital gains tax. The gain is calculated pro rata per year in the life expectancy of the donor, and the taxable portion of the pension payment is divided into ordinary income and capital gains.

Donors do not have to begin to take immediate, annuity payments he said; they can defer payments for a year or more. Which can be a good option for people who work and in a high tax bracket, but planning to retire in a year or so.

Some States require charities to meet the criteria, including the initial registration, notification and annual filing, sponsor of charitable gift annuities. Others are silent. Many are somewhere between the two. Mr. Teitell advises potential donors to check their own States to the American Council on the pension gift (www.acga-web.org/regs/regsoverview.html) Web site.

If the State of origin does not charities require to meet all the criteria, see if a charitable organization is authorized to offer annuities in a stricter State and ensure its financial soundness of the Better Business Bureau (www.bbb.org/us/charity) and Charity Navigator (www.)(CharityNavigator.org).

A healthy approach is not to engage with a charity that does not meet the standards of a more severe State, because pensions are a general obligation of the charity. Although the failure to meet the obligation is rare, some charitable organizations accept reinsurance, a useful to discuss with a potential beneficiary question.

Paul Horrocks, Vice President of the New York Life Insurance Company, which sells individual annuity policies and works also with organizations of charity on gift annuities, said donors could "accomplish the same thing in two ways," a charitable gift annuity that could pay 5% or by dividing the amount in a pure and simple gift of charity and a commercial annuity that would pay about 7%.

Don Greene, Executive national Bank of America Merrill Lynch philanthropic products, promotes charitable gift annuities. They are a means for "donors of bottom-end" to enter the world of "structured philanthropy", said, and "they offer tax benefits and a consistent level of support to a spouse."

The gift is irrevocable, he added, but a person who is committed to charity, by including a bequest in it, for example, might will want to examine a gift rather annuity and enjoy gift in life.

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Podcast: The woes of Job, Pet Boom and annuity Puzzle

The economic recovery from the shock of the financial crisis was never that strong, but the monthly report of the Ministry of labour on the employment and unemployment painted a picture of an economy that may be hard even to maintain its growth.

Catherine Rampell, which covers the economy for the Times, says in the weekend podcast new business that the number of farm jobs created in the United States in may - only 54 000 - was much less than most economists had predicted. The unemployment rate moved in the wrong direction, too - upward, to 9.1% from 9%. And jobs has declined for the first time in seven months. There is little in this report to cheer on, although it is possible that some problems were temporary, from factors such as bad weather and the effects of the earthquake, tsunami and disaster Japan persistent global supply chain.

In a separate conversation on the podcast, David Gillen speaks of Andrew Martin on a sector of the economy which was almost recession-proof: the company pet. As written on the cover of the Sunday of Mr. Martin company, for human Palace pet food have been proliferating and animals "parents", as the industry calls, often brought treats on their cats and dogs even when they have cut back on spending for themselves.

I spoke to Richard Thaler, behavioral Economist at the University of Chicago, on what he calls "the Enigma of the pension" - the unpopularity of pension despite their economic benefits. Traditional pensions are a form of pension, but as most working people move to defined benefit plans such as 401 (k), they are confronted with a whole confusing options at retirement. He wrote in the column from an economic perspective in Sunday business that few of them have been purchasing annuities on the same State if it is in their interest to do so. The reasons appear to be more psychological in nature than a question of pure financial calculation.

In a conversation with Phyllis Korkki, I describe other behavioural dilemma, which is the subject of my column of strategies Sunday Business. It is from "the commercial paradox,"the propensity of many investors to fair trade, regretting some of these trades while feeling unable to do anything about it."" A new study by Barclays wealth highlights these internal conflicts. Because it is associated with the underperformance of frequent market trade, curb this behavior might be helpful. Much like too eat or game, however, for some people often Exchange is not easily corrected.

You can find specific segments of the podcast at these times: economic prospects (priesthood); news summaries (21: 33); the company pet (17: 39); annuities (12: 53); compulsive trading (6: 02); the week ahead (1: 56).

Articles discussed in the podcast are published over the weekend, links are added to this position.

You can download the program you use by the New York Times of the podcast page or iTunes directly.

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New Treasury Rules Ease Purchase of Annuity With 401(k)

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It is one of the biggest conundrums of an aging society: Americans have salted away $11 trillion in retirement plans, yet millions still risk running out of money in old age.

On Thursday the government said it had some new tools to deal with the problem. The Treasury issued several new regulations intended to make it easier, and maybe cheaper, for middle-class people in retirement to transfer the money they accumulated in their 401(k)s into an annuity that would guarantee monthly payments until they die.

“Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security,” said Treasury Secretary Timothy F. Geithner.

The Labor Department also said it had completed rules to let workers learn about the fees various financial firms charge for helping to run 401(k) plans. Labor officials said they thought employers could negotiate better terms if the details were more easily available.

The risk of outliving one’s assets has moved front and center in recent years, as companies have frozen or ended their traditional, defined-benefit pension plans and replaced them with 401(k) plans. Traditional pension plans offer what is, in fact, an annuity, a stream of guaranteed payments from retirement to death. But fewer and fewer employers want to be running an annuity business on the side.

Insurance companies, on the other hand, are eager to wade into what they consider a big and attractive market of graying Americans with I.R.A. and 401(k) balances and little idea of what to do with them. But they have held back, in part, because of tax rules, which Treasury is easing.

One of the changes proposed Thursday would make it easier for employers to work with annuity providers, so that workers can learn about their annuity options at work, rather than having to go to a financial planner or broker.

“I’m trying not to jump up and down in my office, actually,” said Jody Strakosch, national director of annuities for MetLife, who was asked about the new rules while she was reading the 47-page tome from Treasury.

She said MetLife had had suitable annuity contracts available since 2004, but had been selling them mostly to the retail market and not to employers who offer retirement savings plans.

J. Mark Iwry, an official at the Treasury department, said the department hoped in particular to foster a workplace market for “longevity insurance,” something much discussed in policy circles but that employers rarely make available to workers when they retire.

Longevity insurance consists of an annuity whose stream of payments does not start until the retiree is well into retirement — say, 80 or 85 years old. That is the point where policy makers think many will need the money, because they will have exhausted their savings or developed costly health problems. The insurance would kick in and supplement Social Security. Like Social Security, the longevity insurance payments would keep coming every month until the retiree’s death. But because the policy would pay nothing in the first 15 to 20 years of a person’s retirement, it would cost much less than a conventional annuity.

A white paper by the Council of Economic Advisors estimated, for example, that a 65-year-old would have to pay $277,500 for a $20,000-a-year annuity that started immediately, but only $35,200 for one that started at age 85.

With a price so much lower than a conventional annuity, employees would be able to buy longevity insurance to cover their riskiest years with just a portion of their 401(k) account balance.

Most employers that offer annuities give retiring workers an either-or choice: the whole balance as a big check, or the whole thing to buy an annuity. Tax rules make it complicated to calculate the values if the amount is split, so those rules are being relaxed.

When the federal employees’ Thrift Savings Plan let people spend just part of their balance on longevity insurance, there was an increase in participation.

“They found a dramatic pickup in the number of people who were able to take a partial annuity,” said Ms. Strakosch. (MetLife provides the Thrift Savings Plan’s annuities.)

The Treasury also capped the maximum amount of retirement plan money that could be spent on longevity insurance at 25 percent of the account balance, up to $100,000. Mr. Iwry said that would keep high earners from improperly sheltering money, and minimize any effect of the changes on federal tax revenue.

Treasury is also changing the way of calculating required minimum distributions — the amounts that people over 70 are required to withdraw from their 401(k) plans every year. The new method would exclude any money that went to an insurance company to buy longevity insurance or an annuity.

Some of the rules take effect immediately; other changes are in the public comment period.

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