Obama Budget Changes to IRA, 401(k) and Other Retirement Rules

Financial Planning:

BY: ED SLOTT

MONDAY, AUGUST 19, 2013

When President Obama unveiled his budget for the upcoming fiscal year, which begins on Oct. 1, it represented a wish list.

English: Retirement savings for various periods with squirrel and nut analogy (Photo credit: Wikipedia)

But advisors should pay close attention to the eventual compromise because there were a number of significant proposals related to retirement savings accounts.

Here is an overview of six notable proposals and whether your clients would be winners or losers.

1. MANDATORY IRAs

Under the administration’s proposal, employers that have more than 10 workers and have been in business for at least two years would face a new requirement to set up and provide automatic enrollment in IRAs for their employees. Employees would contribute to the IRAs through payroll deductions. In addition, they would be able to elect how much of their salary they wish to contribute to their IRAs (up to the annual contribution limit), or they could elect to opt out.

In the absence of any election, 3% of an employee’s salary would be contributed to the IRA.

The argument: For nearly 15 years, Congress, the Treasury Department and the IRS have been taking steps to increase Americans’ retirement saving contributions by making it easier for employers to establish auto-enrollment in company 401(k) plans. But many small businesses choose not to adopt a retirement plan because of the costs or the burden of complying with regulations. Many small employers also do not take low-cost steps to make retirement savings easier for employees.

A Millionaire by Retirement (Photo credit: mortgagepaymentplan)

The winners: Too few Americans actively save for retirement, and even fewer save appropriate amounts. Although there is some disagreement, numerous studies have shown that automatic enrollment tends to increase participation in retirement savings. The proposal also contains a number of tax credits that small businesses could claim for helping to facilitate employees’ retirement savings.

The losers: Many small businesses say that they are already overburdened with various compliance requirements and that any new rules or regulations would be unwelcome.

2.  EMPTYING INHERITED IRAs

Most beneficiaries of IRAs and other retirement accounts would be required to empty an inherited retirement account by the end of the fifth year after the year of the original owner’s death, according to the administration proposal. (Presumably, required minimum distribution rules would apply, meaning the remaining balance would be subject to a 50% penalty -- like all other missed required minimum distributions.)

Max Baucus, U.S. Senator from Montana. (Photo credit: Wikipedia)

This proposal is a potential game changer for many clients’ estate plans. But this is not the first time the idea has been floated. In fact, since Sen. Max Baucus, a Democrat from Montana, initially introduced the idea several years ago, it has been revisted a few times.

The argument: The Green Book, released by the Treasury Department to explain the proposals in the president’s budget, says the reason for this provision is that “the Internal Revenue Code gives tax preferences for retirement savings accounts primarily to provide retirement security for individuals and their spouses. The preferences were not created with the intent of providing tax preferences to the non-spouse heirs.”

This point has been brought up a number of times when lawmakers are looking for revenue sources, which is happening again now. Some in Congress have often let it be known that IRAs were never intended to exist beyond the lifetime of the retiree who made the contributions. Instead, they argue, they were created to provide a source of retirement income, not a tax-favored inheritance to last another lifetime.

The winners: The required minimum distribution rules for non-spouse beneficiaries can be complex. Requiring non-spouse beneficiaries to withdraw inherited retirement account funds within five years would simplify the rules. The proposal exempts certain beneficiaries, including those who are disabled and minor children.

The losers: If this proposal is adopted, it would effectively end the “stretch IRA” strategy for most non-spouse beneficiaries. Beneficiaries would face more severe tax consequences upon inheriting retirement accounts, and the value of these accounts as potential estate planning vehicles would be diminished. This would also significantly reduce the value of Roth conversions as an estate planning strategy, particularly for older clients.

3. SAVINGS CAP

New contributions to tax-favored IRAs and 401(k)s would be prohibited once clients exceed an established cap, under the president’s proposal. This cap would be determined by calculating the lump-sum payment that would be required to produce a joint and 100% survivor annuity of $205,000 a year beginning when clients reach age 62. (This formula would initially set the cap at $3.4 million.)

Clients with cumulative retirement accounts in excess of this amount would be prohibited from contributing new dollars to retirement accounts on a tax-favored basis, although accounts could still grow as a result of earnings. The cap would be increased for inflation.

The argument: To increase tax revenue, the White House wants to use tax policy to encourage greater retirement savings where needed, but then phase out the benefit for the especially wealthy. “The current law limitations on retirement contributions and benefits for each plan in which a taxpayer may participate do not adequately limit the extent to which a taxpayer can accumulate amounts in a tax-favored arrangement through the use of multiple plans,” the Green Book says. “Such accumulations can be considerably in excess of amounts needed to fund reasonable levels of consumption

in retirement.”

The winners: Not many. In fact, at $3.4 million, this provision would impact only a very small percentage of retirement savers. But if interest rates increase, the cap could go much lower, since annuities paying $205,000 would cost less. This could affect many more retirees.

The losers: While $205,000 is nothing to scoff at, many clients will require substantially more annual income in retirement to maintain their desired standard of living -- especially after taxes are factored in. Such clients will need to look for alternative ways to shelter assets from taxes.

4. A 28% MAXIMUM TAX BENEFIT

Another proposed change to tax benefits: The maximum tax deduction for making contributions to defined contribution retirement plans would be limited to 28%. As a result, certain high-income taxpayers making contributions to retirement accounts would not receive a full tax deduction for amounts contributed or deferred.

The argument: According to the Green Book, “limiting the value of tax expenditures, including itemized deductions, certain exclusions in income subject to tax, and certain deductions in the computation of adjusted gross income would reduce the benefit that high-income taxpayers receive from those tax expenditures and help close the gap between the value of these tax expenditures for high-income Americans and the value for middle-class Americans.”

The winners: For the country as a whole, this provision would help raise revenue. For individual taxpayers who are not in a federal income tax bracket higher than 28%, this provision would not increase their tax liabilities.

Seal of the United States Internal Revenue Service. The design is the same as the Treasury seal with an IRS inscription. (Photo credit: Wikipedia)

The losers: High-income clients would no longer receive a full deduction for amounts contributed or deferred to a retirement account. For instance: If clients who have $500,000 of taxable income currently defer $10,000 into a 401(k), they do not pay any income tax on that $10,000. Without that tax deferral, the income would be taxed at 39.6% (currently the highest federal income tax rate). But if this proposal were to become effective, that $10,000 would effectively be taxed at 11.6% (39.6% minus 28%), since the maximum tax benefit that a client could receive would be limited to 28%. That would equate to an additional tax bill of more than $1,000.

5. SOME RMD ELIMINATION

Clients with combined savings across all retirement accounts of $75,000 or less would be exempt from required minimum distributions.

The argument: “Under current law,” the Green Book says, “millions of senior citizens with only modest tax-favored retirement benefits to fall back on during retirement also must calculate the annual amount of their minimum required distributions, even though they are highly unlikely to try to defer withdrawal and taxation of these benefits for estate planning purposes. In addition to simplifying tax compliance for these individuals, the proposal permits them greater flexibility in determining when and how rapidly to draw down their limited retirement savings.”

The winners: The proposal would decrease the compliance burden and increase simplicity for Americans with smaller retirement account balances. These individuals often have less savings on the whole and need to withdraw money from their retirement accounts anyway to meet expenses. In addition, those with low account balances often do not have access to the same level of financial expertise as those with larger account balances.

The losers: Not many. Indeed, it’s hard to find something to complain about. This provision would eliminate required minimum distributions for nearly 50% of IRA owners.

6. NON-SPOUSE ROLLOVERS

Non-spouse beneficiaries would be allowed to move inherited retirement savings from one inherited retirement account to another through a 60-day rollover period -- similar to the way they can currently move their own retirement savings.

The argument: The goal is to close the difference in treatment of spouse and non-spouse beneficiaries. According to the Green Book, “differences in rollover eligibility between surviving non-spouse beneficiaries and surviving spouse beneficiaries (and living participants) serve little purpose and generate confusion among plan and IRA administrators and beneficiaries.”

The winners: Unifying the rollover rules for retirement account owners and beneficiaries would greatly simplify this aspect of retirement accounts and reduce the number of irrevocable and costly mistakes frequently made by beneficiaries.

The losers: None. Of course, if most beneficiaries are required to empty the inherited account in five years (as required under the second proposal), this provision would be far less beneficial than it would be under current law.  FP

Ed Slott, a CPA in Rockville Centre, N.Y., is a Financial Planning contributing writer and an IRA distribution expert, professional speaker and author of many books on IRAs.

'via Blog this'

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Study: Evaluating the Best Retirement Withdrawal Strategies

Financial Planning

By Elizabeth Wine
July 10, 2012




Retirement (Photo credit: 401(K) 2012)

According to a study of retirement withdrawal strategies, one of the more popular retirement drawdown methods is often the least-efficient way to go to maximize lifetime income for a retiree, while a simple rule used by the Internal Revenue Service works quite well.

The report, “Optimal Withdrawal Strategy for Retirement Income Portfolios,” conducted by Morningstar, measured five different drawdown strategies in various case studies. The real lesson from the analysis is that plans that dynamically adjust for changes in both market and longevity beat more traditional methods. It also concluded that investors should reevaluate how much to withdraw every year based on these two variables. A sophisticated simulation that takes both variables into account and is run every year is best.

Also See: VIDEO: Rethinking Retirement Withdrawal Strategies




retirement (Photo credit: 401(K) 2012)

But the recently released study found that the IRS method that takes at least one variable – longevity --  into account is a good option if an investor doesn’t have the simulation capability through an advisor or a 401(k) managed account program.

“The optimal withdrawal strategy incorporates mortality probability where the projected distribution period is updated based on the mortality experience of the retiree (or retirees) and the withdrawal percentage is determined based on maintaining constant probability of failure,” the study stated. “This approach best replicates how a financial planner would (or at least should) determine the available income from a portfolio for each year during retirement,” the report’s authors concluded. …

What’s more, after analyzing the five methods, the study found that at a couple of popular methods were in fact, poor choices for clients.

The well-known 4% rule -- in which the first year withdrawal rate is set at 4%, followed by inflation-adjusted withdrawals in subsequent years -- addresses neither market performance nor longevity. The authors call this the “Constant Dollar” approach, based on the idea that a portfolio can maintain a constant withdrawal rate or constant dollar amount either in real or nominal terms for a fixed period, such as 30 years. The authors concluded that it “is often the least efficient way to maximize lifetime income for a retiree.”

The Endowment Approach, which the report’s authors call the “constant percentage approach,” is the simplest. It withdraws the same percentage of the account balance annually.




Longevity (Photo credit: RachelmBray)

A third method, the Constant Failure Percentage, is designed to maximize withdrawals to the highest extent possible without causing the entire portfolio payment plan to fail. This is based on the idea of the probability of failure. Withdrawal amounts, which vary depending on the equity allocation of the portfolio as well as the year, are determined in order to keep that probability of failure constant through time. The problem with this strategy is that without updating, it doesn’t account for longevity well enough.




Logo of the Internal Revenue Service (Photo credit: Wikipedia)

However, a fourth strategy, the Required Minimum Distribution (RMD) method used by the IRS, does a better job of accounting for longevity. The IRS defines these distributions as generally the “minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 and ½ years of age, or, if later, the year in which he or she retires.” The distribution is calculated “by dividing the prior December 31st balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes” in separate tables, the federal agency states on its website.

The final approach, the Mortality Updating Failure Percentage, combines the Constant Failure Percentage and the RMD method. In this scenario, the annual withdrawal rate is based first on the number of years remaining, then calculated based on keeping a constant probability of failure for that period. It did the best job of accounting for both market returns and longevity.

To come up with the framework for evaluating different strategies, the team headed by David Blanchett, Morningstar’s new head of retirement research, came up with a metric called the “Withdrawal Efficiency Rate” (WER), which compares the withdrawals received by a 65-year-old male and female couple by following a specific strategy to what could have been received had the retirees had “perfect information” at the start of retirement. They tested it across the five withdrawal strategies through Monte Carlo simulation analysis. #

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Larger Withdrawals From IRAs in 2010 May Help Savers With Taxes

Bloomberg

By Danielle Kucera - Oct 20, 2010 11:01 PM CT
For U.S. taxpayers making mandatory withdrawals from an individual retirement account, 2010 may be a good year to take out more than necessary because tax rates may rise. …
Savers who may be in a higher tax bracket next year should consider withdrawing more than the minimum in 2010, said Mark Nash, a partner in the Dallas office of the New York-based Private Company Services practice of accounting and advisory firm PwC. Required withdrawals are based on a formula of the account balance and the individual’s age.
“Pulling out a large sum in 2010 would lessen the 2011 amount, and make that year’s distribution lower,” said Nash, who advises high net-worth investors. …
The U.S. government suspended required minimum distributions for tax year 2009 in response to plummeting account balances after the Standard & Poor’s 500 Index dropped 38 percent in 2008. Mandatory distributions returned in 2010 as the economy strengthened and the S&P 500 rose 23 percent in 2009. Roth IRAs, which are funded with post-tax dollars, are exempt from minimum withdrawal rules while the owner is alive.

Rising Rates

President Barack Obama has proposed allowing the top two marginal income tax rates to rise to 39.6 percent and 36 percent from 35 percent and 33 percent for individuals earning more than $200,000 and couples making more than $250,000. Congress is scheduled to take up taxes when it returns from recess in November.
“This uncertainty doesn’t mean that people shouldn’t be sitting down and doing their planning now,” said Greg Rosica, a tax partner at consulting firm Ernst & Young LLP in Tampa, Florida, and contributing author to the Ernst & Young Tax Guide.
Someone who may be in a lower tax bracket in 2010 because of large deductions or less income should also consider taking a bigger distribution this year to take advantage of lower rates, said Rebecca Pavese, an accountant at Palisades Hudson Financial Group’s national tax practice in Atlanta.

Combine Withdrawals

Taxpayers who aren’t already taxed at top rates should make sure taking a bigger distribution won’t tip them into a higher bracket, said Bill Fleming, a managing director in the Hartford, Connecticut, office of PwC. …
Those who pay estimated taxes during the year can request the account administrator to withhold money from their RMDs and pay income tax just once at the year’s end, said Rosica of Ernst & Young. That way they can hold onto their money longer and invest it without paying a penalty for underpayment, Pavese said.
The law assumes that payments are made equally throughout the year unless the taxpayer states otherwise, according to the IRS.

Charity Deduction

… Any IRA account holder can give all or part of a distribution to charity and take a deduction for the donation, said Debbie Cox, a Dallas, Texas-based wealth adviser for J.P. Morgan Private Bank, which is based in New York. A provision that allowed taxpayers to roll over a distribution directly to a charity and avoid income tax expired at the end of 2009, she said.
IRA holders should also try to take their required withdrawals at roughly the same time every year to avoid mistakes or forgetting about it, Fleming, of PwC, said.
To contact the reporter on this story: Danielle Kucera in New York at dkucera6@bloomberg.net.
To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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Making Retirement Savings Last

Insurers and plan sponsors want the government to make it easier to offer annuities in 401(k) plans.

Alix Stuart - CFO.com | US

September 28, 2010
With companies continuing to shift away from pensions toward 401(k)s, many CFOs no longer have to worry about a long stream of future obligations draining their corporate coffers. They may, however, find themselves with a new worry: retired employees draining their own coffers.
Among the first waves of 401(k) holders retiring, most are taking the lump sum of their savings and putting it into IRAs. That's good news in that they're still saving, says Betsy Dill, senior partner at Mercer. The bad news, though, is that "there's a high probability they could outlive whatever money they've accumulated," since "there's not a good awareness of how to take that lump sum and create an income stream out of it."
However much companies might want to help, though, the Obama Administration's suggestion last January that annuities should be an option within 401(k) plans struck fear in the heart of some CFOs. Right now, only about 2% of employers offer such an option among investment choices, according to Hewitt data, in large part because the rest are daunted by the liability that seems to accompany it.
… The problem that plan sponsors may face in offering annuities is with vetting the insurance companies that sell them. The big question: if an insurance company goes under 20 or 30 years after the investment is made, is a plan sponsor liable for continuing the payments?
A recent joint hearing by the Labor and Treasury departments on the topic — broadly known as "lifetime income" — should help plan sponsors breathe easier. After gathering input from various entities in the retirement industry, including insurance companies, 401(k) plan providers …, consultants, and a group representing plan sponsors, "it is clear that the government is not going to mandate" the inclusion of annuities in 401(k) plans, says Alan Vorchheimer, a principal in Buck Consultants's retirement practice.
Vorchheimer believes the government is not even likely to mandate some suggested educational illustrations, such as what a person's savings would look like as a stream of annuitized payments. Rather, he and others expect the DoL to make things easier for companies that offer 401(k)s.
"For any CFOs considering a solution [to how their employees draw down retirement savings], there's the potential for new rules that will make it easier," says Alison Borland, retirement outsourcing strategy leader at Hewitt. Those rules could include a safe harbor around annuity products that would clearly delineate that plan sponsors are not liable for any failures on an insurance company's part to pay out.
Currently, the most involved a typical company will get in helping employees tap into retirement savings postemployment is to point them toward a number of rollover options, including IRAs and annuities. Dill says she sees more plan sponsors getting interested in "creating a menu of spend-down options," possibly including basic annuities, more-complex products such as an annuity wrap based on a target-date fund, or structured payouts from a target-date fund designed to cover the lifetime of a retiree.
The main benefit of having an annuity offered within a plan is that companies with larger numbers of employees could potentially negotiate for lower fees, notes Borland. The approach would also make it easier for employees to purchase annuity assets over time rather than buying all at once.
However, consultants say that even if the government makes it easier for companies to offer annuities, there isn't likely to be a stampede of employers or employees to them. "Employees are not asking for it at this point," says Vorchheimer, in part because the financial crisis has squelched trust in the big insurance companies that offer annuity products.

Ten IRA Tasks To Do Before The Year Ends

Financial Advisor Magazine 
…Despite what might seem like paltry balances, IRAs in the aggregate "are an incredibly important piece of the retirement puzzle, since they hold the largest single share of the $13 trillion in U.S. retirement assets," Craig Copeland, senior research associate at EBRI and author of the study, said in a release.

Your IRA, your own piece of the retirement puzzle, whether paltry or not, requires some tender loving care, especially during the last few months of the year. Here's a list of what you might need to do before 2011.

1. Take your required minimum distribution
Make sure all RMDs are taken for the year.

"Look at all owned IRA accounts and employer plans for individuals age 70 1/2 or older this year, as well as at inherited IRAs, employer plans and Roth IRAs," said Beverly DeVeny, an IRA technical consultant with Ed Slott and Company.

"Beneficiaries, no matter what their age, must take distributions from all inherited accounts beginning in the year after the death of the account owner," she said, adding that inherited accounts must be split before year end so beneficiaries can use their own life expectancies to calculate their RMDs.

Speaking of distributions, take any 72(t) distributions that are required for 2010. "If you fail to do this, you will pay penalty and interest retroactively to the first year you started taking these distributions," said Edward J. Lustberg, a certified public accountant.

2. Check for excess contributions
It might seem unlikely, given that the average IRA contribution is $3,798, but it's possible that you contributed too much to your IRA during the year. If so, remove any excess contributions before year end. You will be charged a 6% penalty for excess contributions, said Lustberg.

The maximum amount of an annual IRA contribution for a specified tax year, and whether or not your contribution is tax deductible, varies depending on a number of factors related to eligibility rules, according to Fidelity Investments. In 2009, the maximum allowable contribution to an IRA is the lesser of 100% of eligible compensation or $5,000 in 2009, and $6,000 for those age 50 or older.

3. Is everything in place?
Take nothing for granted when it comes to your IRA. "Before year end, double check on all IRA funds that moved during the year," DeVeny said. "Make sure that IRA funds went into IRA accounts, not non-IRA accounts or Roth IRAs and be sure that Roth IRA funds went into Roth IRA accounts. Look for any unexplained distributions during the year."

4. Can you do a stretch IRA?
Check whether your IRA custodian or 401(k) plan administrator will allow for the so-called "stretch" for beneficiaries, said Ben E. Connor, an attorney with Connor Law Firm.

The stretch means that beneficiaries can use their own life expectancy for distributions. In addition, check whether the custodian or plan administrator will accept a durable power of attorney, and disclaimers.

"The answer to these questions will have substantial impact on the success of their estate plan," Connor said. (If the custodian or 401(k) plan administrator doesn't accept a durable power of attorney or disclaimer, you might consider another custodian or plan administrator.)

5. Who's your beneficiary?
Here's some well-worn but can't-be-repeated-often-enough advice: Review your beneficiary designations. Make sure there is both a primary and a contingent beneficiary named on the beneficiary designation form.
"If there is no beneficiary named, the IRA proceeds will go to the estate and lose the tax advantage of the stretch," said Connor. "If there is no contingent beneficiary, and the primary beneficiary has died and no new primary beneficiary has been named, then the assets also go to the estate with the same negative result."

Image via WikipediaIt's especially worth checking your beneficiary designations if you are divorced, recently or ever.

"Make sure your ex-spouse has been deleted as a beneficiary, unless you want them to remain as a beneficiary," said Connor. "The U.S. Supreme Court has recently ruled that the beneficiary named on the beneficiary designation form trumps divorce."

Connor also advised against naming a "living trust" as the beneficiary. "A living trust should not be the beneficiary because the living trust must qualify as a 'designated beneficiary' to receive favorable stretch and tax treatment," he said. "I find that most living trusts do not qualify, or lose their designated beneficiary status through later changes to the trust."

Make sure your custodian has a written copy of your beneficiary designations.

6. One last chance for Roth conversions
If you plan to do a Roth conversion in 2010, "the funds must leave the IRA by Dec. 31 to be reported and taxable as a 2010 distribution and conversion," DeVeny said. "The funds can then be rolled over to the Roth IRA up to 60 days after they are received by the account owner--up to March 1 if the distribution was received on Dec. 31."

Contrary to what some might believe, you do not have until April 15, 2011, to do a 2010 conversion, DeVeny said.

Here is another reason why you might want to convert some or all of your IRA to a Roth IRA: according to Connor, the Roth IRA could fund a credit shelter or by-pass trust.

"A Roth IRA is usually not subject to the trust tax rate," he said. Also, review your power of attorney to make sure the agent has authority to recharacterize the Roth, if needed, Connor said.
Remember, too, that anyone can convert their traditional IRAs to a Roth IRA in 2010 regardless of income. What's more, you can pay the taxes over two years, instead of one.

Image via Wikipedia7. Turn wealth into income
Right about now, the Social Security Administration is sending you a report that tells you how much income you will receive in today's dollars when you retire. Write down that number on a piece of paper.
Now, total up the value of all IRAs and 401(k)s in your household and multiple that number by 0.04. That number is the amount some experts say you could withdraw from your retirement in today's dollars.

Now, add that number to your Social Security benefit figure, and then subtract that amount from your income. The results are roughly the amount of money you will need from other sources--such as work, pensions, reverse mortgages, life insurance or inheritances--to enjoy a lifestyle similar to what you have today. …

8. Review your investment plan
Consider updating your investment policy statement or plan. "Make sure your asset allocation remains appropriate given your financial goals," said Michael L. Gay, a certified financial planner with Portfolio Solutions.

Also, rebalance your IRA if you haven't done so within the past year. It's best to rebalance your IRA in a holistic manner. That is, look at all your assets in all your accounts, taxable and tax-deferred.
In many cases, consider putting your fixed-income investments in your tax-deferred accounts and those investments that produce capital gains and dividend income in your taxable accounts. And while you're at it, check whether you've bought or sold any inappropriate investments in your IRA accounts.
"Since IRAs are tax-deferred vehicles, it makes no sense for them to hold 'tax-preferenced' investments such as municipal bonds …," said Gay.

Gay also suggested using your RMDs to rebalance. It could save on transaction costs.

9. Roll old 401(k)s to an IRA
If you have one or more 401(k)s sitting with former employers, consider rolling that money over to an IRA. "You'll generally get better investment choices, lower costs and more control of your investment assets," said Gay.

10. Recharacterize your Roth IRA If you converted a traditional IRA into a Roth IRA and now realize that your income taxes were higher than expected due to the conversion, or you're short money to pay the income tax or you're unwilling to pay the income tax, consider a recharacterization, DeVeny said. That is, consider putting the money in the Roth IRA back into your traditional IRA.

"This is the last year that some individuals must recharacterize," DeVeny said. "Those who have no choice are individuals who converted in 2009 and whose modified adjusted gross income exceeded $100,000 or who were married filing separate."

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The Pros and Cons of 401(k) Annuities

Retirement Income Journal

By Kerry Pechter Thu, Sep 16, 2010

One witness at the DoL/Treasury hearings this week asserted that mandatory annuitization of DC assets at retirement is needed. The government, as well as sponsors and plan providers, have largely ruled that out.
The prominence of the witnesses testified to the significance of the DoL/Treasury Department hearings this week on so-called "401k annuities" and other tools that can help plan participants turn their savings into income--either while they save, when they reach retirement, or in retirement. …
Trade, labor, and consumer advocacy groups also contributed their thoughts. The AFL-CIO, the Investment Company Institute, the Profit-Sharing and 401(k) Council of America, the American Council of Life Insurers, the American Society of Pension Professionals and Actuaries and the Spark Institute all gave testimony. Other groups and firms can contribute statements via e-mail over the next month.
Some witnesses praised in-plan annuities, while others, like Steve Utkus of Vanguard, tried to bury them. To be sure, there are plenty of good reasons for putting income options in plans, either as savings vehicles (deferred annuities) or exit options (immediate annuities, payout funds).
Big plan sponsors have economies of scale and bargaining power that lower the costs of products, administration, and education. Plan sponsors are also in a unique position to set up a program that applies the employer match to the purchase of future income… . Like contributions to a defined benefit plan, that kind of program would leverage the time value of money and mitigate the interest rate risk and timing risk associated with the lump sum purchase of an annuity at retirement.   
Counter-arguments
But there are plenty of … counter-arguments for putting annuities in DC plans. For plan sponsors, there are potentially huge expenses associated with evaluating the costs and benefits of different income product vendors and in educating employees. Above, all liability for picking the wrong provider or for giving employers bad (in retrospect) advice scares them. “Fiduciaries are paranoid and rightly so,” says Sheldon Smith, an ERISA attorney and president of ASPPA.
As for participants, most of them won’t retire from their current employer/plan sponsor. From the participant perspective, the average person spends only 4.2 years in any particular job and might participate in several 401(k) plans. There are also portability issues. Participants may want to change employers or get out of income products. Employers may want to change annuity providers.
Adapting recordkeeping systems to multiple income options, or options that might change suddenly, could also pose problems, especially for small employers. Ninety-percent of plans have fewer than 100 participants. Only the largest 10% of plans, which account for 85% of all participants, may be able to cope with the legal, educational, and recordkeeping challenges of in-plan options.  
Other problems: most 401(k) accounts, even at retirement, are too small to annuitize at all, let alone big enough to allow for the ideal solution: partial annuitization. Annuity purchases can also trigger the need for spousal approval, potentially increasing paperwork for sponsors. Gender-neutral pricing rules in 401(k) plans also mean that retail annuities, which have gender-specific pricing, can offer men much higher payout rates than in-plan annuities.
Alternate vision
The zeal for putting guaranteed income options in DC plans is limited mainly to insurers. Asset managers … which are the custodians of millions of rollover IRAs, believe that most people will consolidate their tax-deferred savings in an IRAs and then buy an annuity—or simply take systematic withdrawals. Investment advisors think along the same lines, and millions of Americans are likely to take this path.
Even if you build in-plan annuities, will they come? There’s a lot of disagreement over whether Americans want in-plan annuity options. Even in DB plans, 90% of retirees who have the option choose lump sum payouts over lifetime income streams. Shlomo Benartzi of UCLA, and an Allianz Life consultant, cited evidence of high annuitization rates in some companies, and MetLife said participants like a partial annuitization option. But the evidence is inconsistent. Most people don’t want to give up control over their assets or even part of their assets, especially not at time they stop working, when their retirement plans are still unsettled.
There’s also the crowding-out problem. Thanks to Social Security, most middle-class plan participants will get at least half of their retirement income coming from an annuity, and have no compelling reason to annuitize their DC savings. On the contrary, they may need their DC assets to stay liquid for emergencies, bequests, weddings or simply long-deferred pleasures.
To overcome this resistance or inertia, some witnesses said, the government might have to approve a qualified default annuity option, analogous to auto-enrollment and the qualified default investment options in 401(k) plans. One witness, Josh Shapiro of the National Coordinating Committee for Multiemployer Plans, asserted that nothing short of mandatory annuitization of DC assets at retirement will really change the game. The DoL and Treasury, as well as sponsors and plan providers, have already ruled that out.
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