November 25, 2014
By Diane Wasser, CPA
The number of baby boomers retiring over the next several years is mind boggling. The amount of retirement plan distributions related to such retirements, along with the number of people that will be living on retirement income, is equally mind boggling! Therefore, an annuity distribution option in a 401(k) plan is an interesting thought. Historically, such an option in a defined contribution plan was rarely a subject of discussion.
Due to recent action, however, we may see many plans offering an annuity distribution option in cases where the plan document provides for automatic enrollment. Specifically, the U.S. Treasury Department recently issued guidelines to encourage annuities in 401(k) plans. The guidance is in Notice 2014-66, and notes plan sponsors can include deferred income annuities in target date funds that are used as a default investment and that such can be done in a manner that complies with plan qualification rules. This even can be accomplished, according to the Notice, if such is available only to older participants.
Essentially, this offers participants an option that reduces the risk that they outlive their retirement benefits, which is a concern of many given the rises in life expectancy and the uncertainty of the markets. It is certainly an interesting concept--I think we will be hearing more and more about the specific aspects of such a plan provision.