Are you a 401k or 457 Retirement Plan Participant? Then, you are eligible for pre-funded, Guaranteed Lifetime Income Benefits, IF YOU CAN GET THEM
Administrators do not allow 401k and 457 plan participants the option to fund for Future Income Guarantees.
Background
Below are four common income options 401k and 457 plan participants can choose from to generate retirement income. The fourth option combines the features of options one, two and three, allowing anyone from their 20's to 60's and beyond to continuously accumulate a portion of their plan account to fund a guaranteed future income option, which allows for ongoing guaranteed growth with principal protection, and access to principal at any time, even in retirement. Plus, the participant can turn on their guaranteed lifetime income whenever they are ready to retire.
Four Common 401k and 457 Plan Income Options:
1.Invest in mutual funds and when you retire spend just the investment earnings, which typically consist of mutual fund interest and dividends. Don't touch the principal. Income will fluctuate and may not be sufficient. Principal is subject to investment risk.
2.Invest in mutual funds, and when you retire draw down the principal cautiously so you don't outlive your assets, called systematic withdrawals. You could run out of money if you live past your assumed age of death. Principal is subject to investment risk.
3.Buy an immediate income annuity from an insurance company after you retire and live off the monthly benefit the insurance company pays you. Steady income but no access to Principal. You account growth before retirement is uncertain because of mutual fund market fluctuation.
4.*If you want to guarantee future lifetime income with access to principal at any time, using a portion or your plan participant account, regardless of your age, then a fixed index annuity with a guaranteed lifetime income rider may just be what you are looking for. Income payments can be guaranteed years in advance for deposits directed by the plan participant, whether in their 40's, 50's, 60's or later. These income payments will continue until the death of the annuity owner, while the underlying equity index contract continues to accrue interest credits. Principal and Income payments are guaranteed, with access to Principal at all times. If the owner dies before the policy's accumulation value is depleted, there are two options:
•The spouse can continue to receive the Guaranteed Withdrawal Payments until the policy's accumulation value is depleted.
•The spouse or beneficiary can receive any remaining accumulation value in a lump sum or in a series of payments.
*Note: July 1, 2014 the Treasury Department has added another income option to the mix above. It is the Deferred Income Longevity Annuity, which will reduce your Required Minimum Distribution requirements, and like option 4 above, you cannot outlive the payments. The Treasury Deferred Income Longevity annuity will soon be available to you, the plan participant, through participating insurance companies, if adopted by your retirement plan. Details of the new Treasury Deferred Income Longevity Annuity are available on request.
Sounds great, right? But wait, option 4 above and the Treasury Deferred Income Longevity Annuity will not be that easy to get. 16% of 401k plan participants have some form of future income option with many having to choose from the income riders of non-guaranteed variable annuity securities of the plan custodian since that was the only option available. That leaves 84% of plan participants who do not have any kind of future income funding option to choose from.
The problem comes because the guaranteed future income option mentioned in # 4 above, and now including the Treasury Longevity Annuity, are funded by a fixed annuity which is considered a guaranteed savings and income contract, guaranteed by the issuing insurance company to the plan, with values changing annually, and reflected in an annual statement including any new deposits during the year, sent to the policy owner, and not by electronic data transmission. This fixed annuity contract, requires the plan administrator to manually report and keep required ERISA records VS a mutual fund or variable annuity than can be administered electronically, because they are securities whose values fluctuate daily and are not guaranteed.
Many 401k and 457 plan administrators refuse to approve the use of any savings products like the fixed annuity in #4 above. These products are considered "outside assets" and not part of the current investment options called an investment platform. Products like fixed annuities require manual recordkeeping and reporting. There are several reasons for the plan administrator's refusal to administer these products, but it usually comes down to one or more of three reasons. 1. Their business model takes into account only the basic investment platform's mutual fund electronic data transmission with no deviation. 2. If an insurance company is the 401k or 457 plan custodian of a group 401k or 457 annuity contract and also the administrator, the insurance company will generally refuse to approve other insurance company fixed annuities as a plan savings option to fund #4 above because their software systems would have to be modified at great expense. 3. The administrator, whether a retirement plan trust or insurance company group 401k or 457 contract may offer to do the fixed annuity record keeping and reporting, but at a very high, unrealistic service fee to the plan or plan participant.
What can you, the plan participant do? If you want a guaranteed future income option added as one of your saving selections, even if you already have a variable annuity option in the plan, tell your employer you want the fixed annuity added to the plan options. It would be helpful to let the employer know they may have trouble getting their current plan administrator to approve adding the option because they may not want to do the manual recordkeeping and reporting, or if they do, they may want to charge a high cost for this manual service. These administrators may need to be replaced with a "fixed (guaranteed) annuity friendly" administrator, usually at the same or lower administrative cost your plan is already paying.
First, you need to have some idea of the insurance companies that offer a guaranteed future lifetime income annuity option similar to the annuity option mentioned in number 4 above. Since, this may be a highly specialized department inside the insurance company; it will take a qualified agent to locate the correct department. For example, Lincoln Financial, Nationwide and Prudential work primarily with large employers like United Technologies with 200,000 employees. Life Insurance Company of the Southwest (LSW), part of the National Life Group provides annuity options like the above number 4 option, and will work with plans with as few as one plan participant, up to several thousand. LSW primarily works with local independent insurance agents throughout the United States.
Finally, you will want to contact a local annuity insurance agent who is knowledgeable about which insurance companies to use for your plan and participants, how the fixed annuity product will work inside your plan, and, if necessary, help your employer select an annuity friendly 401k or 457 Plan Administrator. The agent should be able to give you some guidance in this relatively new area of Guaranteed Future Lifetime Income.
Jim Pedigo, CLU, ChFC, CASL
Retirement Planning & Income Advisor, Orlando, FL 800 633-7966
http://www.frw.401khelpcenters.com
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