The Internal Revenue Service (IRS) and Treasury Department have issued instructions aimed at popularizing income annuities usage in the 401(k) plans.
The guidance that was issued on October 24 in Notice 2014-66 clearly communicates that the plan sponsors may include the deferred income annuities when it comes to target date funds that are utilized as the default investment. This should be done in accordance with the qualification rules of the plan. This choice is optional for participants and plan sponsors.
Planning tool
According to J. Mark Iwry, the senior adviser to Secretary of the Treasury, who also holds the post of the Deputy Assistant Secretary for Retirement and Health Policy, as boomers approach retirement, and with the increase in life expectancies, the income annuities could be considered as a notable planning tool needed for a secure retirement. He also said that the Treasury is trying to increase retirement income availability options for working families. When income annuities use is encouraged, this guidance can assist retirees in protecting themselves from the incidence of outliving their savings.
A number of 401(k) plans that are sponsored by the employer provide what is termed as target-date funds as the default investment for participants who do not positively select a different kind of investment. The name, target date funds, is derived from the gradual shift in investment allocation from equities to fixed income assets, as participants get closer to attaining the intended retirement year.
Until the end of life
The income stream provided by the deferred income opportunity usually continues all through the life of the individual. However, it is not intended to start until some time has elapsed after the purchase. This is a solution that is cost effective for retirees who are willing to utilize a component of their savings as a guard against outliving their assets. It can also help them avoid overcompensating by unnecessarily restricting their retirement spend.
The guidance offers plan sponsors an extra option so that employees find it easier to consider utilizing a lifetime-income opportunity. Employees, instead of giving all the account balance towards annuities, spend a component of the savings to buy guaranteed life income while retaining the remaining savings in other investments. In this guidance, the target date fund may contain annuities that permit payments starting either immediately post-retirement or at a future date.